Narrow Recovery

Quarterly Economy Update

The industry and services sectors are doing well, but the thin spread of recovery and stagnant investment activity are matters of concern

The assessment of the impact of drought had dominated the economic scene in the July-September quarter. GDP forecasts for the economy were pared by all the forecasting agencies. The Reserve bank too lowered its GDP growth forecast to 5.5 from 6.0 per cent for 2002-03. The performance of the economy as per the latest data released in the third quarter (October-December) has been quite encouraging.

Industrial performance shows no impact of weak monsoons. Exports have slowed down but are still comfortable at over 13 per cent, in line with the annual target of 12 per cent. Current account balance turned in a surplus, forex is at a record $68 billion, inflation picked up a bit but has not crossed the four per cent mark. The southward journey of interest rates continues.

Does this imply that everything is going well for the economy? Not quite. Weak agriculture will bite on the economy's performance in the months to come. The industrial recovery is thinly spread, and the spike in oil prices - in the wake of tensions in West Asia - remains a critical risk factor. The disinvestment programme seems to be losing steam. Another fiscal slippage is around the corner and the appreciating rupee may slow down exports.

The recent data on GDP and industrial production does not show signs of adverse monsoons. As per the latest data released on December 31, overall GDP growth during the second quarter of this fiscal stayed at a healthy 5.8 per cent. The buoyancy in the industry and services sectors offset the adverse impact of a flat agriculture during this period.

The Index of Industrial Production (IIP) registered a growth of 6.2 per cent in October taking industrial growth in the first seven months of FY03 to 5.5 per cent. Manufacturing, which accounts for the bulk of industrial sector, clocked 6.4 and 5.6 per cent growth in October and in the first seven months of this fiscal respectively. The overall healthy performance, however, masks the thin spread of manufacturing growth.

Six sectors viz. food products, transport equipment, beverages and tobacco, basic chemicals, metal products and textiles, which have a weightage of 49 per cent in the manufacturing sector, contributed 99 per cent to manufacturing growth. The critical indicator of sustained recovery is buoyancy in investment, of which there is no sign of a pick-up yet. Machinery and equipment registered negative growth in October and overall dismal growth of 0.5 per cent in the first seven months of FY03.

The use-based classification of IIP offers some interesting insights into the dynamics of industrial growth. Completely isolated from the impact of weak monsoons, consumer non-durables - at 25.2 per cent growth in October - continued to be the fastest growing segment in the use-based category.

Consumer durables, on the other hand, registered a negative growth of 5.9 per cent. The current slump in consumer durables is partially explained by the lack of purchasing power. Depressed stock markets together with falling interest rates have had a telling impact on non-salary income.

However, the fall in prices of durables together with access to cheaper finance in the last few years offset the impact of reduced income to a great extent. Consequently, consumer durables registered double-digit growth from 1999-00 to 2001-02. The favourable impact of a fall in prices and cheap finance seems to have waned off now. This, together with the slowdown in agriculture this year, has reduced the ability of consumers to go in for purchases of durables despite falling prices.

In contrast, non-durables are yet to feel the impact of poor monsoons. But the sustainability of high growth in this segment is suspect due to poor agriculture this year. Buoyancy in capital goods is primarily driven by growth in transport equipment and parts, which clocked 24 per cent growth in October.

Robust growth in exports (13 per cent in the first seven months) has been another highlight of the macroeconomic performance this fiscal. The recent months, however, show a weakening of the growth in exports.

The buoyancy earlier this year was driven by two factors: depreciation of the currency during 2001 and early 2002 leading to increased competitiveness and recovery in the US economy. The impact of both these appears to be waning. The CRISIL Centre for Economic Research has developed an index labelled Parameter of Competitiveness (PARC) to gauge India's export competitiveness vis-