Contrasting trends in IIP and export growth, but economy fine

Industrial production and exports, two important economic parameters, today showed contrasting trends as expansion in factory output plunged 4.4% in April while outward shipments soared 57% in May.

Stock markets did not take into account the comfort of solid performance by exports, with the Bombay Stock Exchange benchmark index Sensex taking a hit of over 100 points.

Economists said such a divergence in trends of two economic indicators is not very common but happens at times but asserted that the "basic story is that the economy is doing fine".

"Exports and Index of Industrial Production traditionally are not co-moving. The new series of IIP suggests the slowdown in industrial activity is not as severe as it would have been under the old series.

"We can expect exports also to slow down a bit in the next few months but the numbers will still remain robust. As for the IIP, it will  grow in single digits in near future and not collapse completely. So, the basic story is that the economy is still doing fine," Standard Chartered's Head of Research Samiran Chakraborty said.

Crisil's Chief Economist DK Joshi said that this type of situation though not very common, still happens at times, especially when exports-linked goods are doing comparatively well.

"We, however, believe that exports will return to the normal level in the next few months as this kind of high growth is not sustainable over a long term. As for IIP, the average growth in the industrial production during 2011-12 is likely to be 7%," he added.

According to the data with a base year 1993-94, the index of industrial production (IIP) nosedived to 4.4% in April from 16.6% in the year ago period.

IIP shrunk by more than half to 6.3% during April, according to a a new series with a base year of with 2004-05 base year.

Industrial growth plummeted mainly due to a poor showing by the manufacturing and mining sectors, a development that the government described as "disturbing".

Incidentally, the government apparently worried over the performance of the manufacturing sector, accorded an in-principle approval to a new manufacturing policy that allows flexible labour deployment.

Finance Minister Pranab Mukherjee said, "The IIP growth figures are disturbing. [We] need to wait for longer term IIP growth to see the trend."

Exports, on the other hand, jumped by 56.9% year-on-year to $25.9 billion in May maintaining the growth momentum that began last fiscal.

Along with rising exports, the imports too went up by 54.1 at $40.9 billion during the month, pushing up the trade deficit to $15 billion during May. Imports grew highest in the last four years.