Breathing easier

Firmness in industrial output will help policy-making

The Index of Industrial Production numbers for September 2009 revealed a growth rate of 9.1 per cent for the overall index and 9.3 per cent for the manufacturing sector, which comprises almost 80 per cent of the index. This was slower, but only slightly so, than the impressive 10.4 per cent notched up by the general index last month. This took the first half (April-September) growth rate of the index up to 6.5 per cent, appreciably better than the 5 per cent recorded in the corresponding period of 2008-09. The steady acceleration of the index over the past three months reinforces the perception that the economy is on a relatively robust, even if still moderate, recovery path.

From a disaggregated perspective, the most striking feature of the September numbers is the persistent acceleration in consumer durables. This use-based category has been leading the pack with growth rates in the double digits for a few months now. In September, however, the year-on-year growth rate went up to 22.2 per cent. Favourable pricing on the back of excise duty reductions has been a factor, but the most significant explanation for this is that the Sixth Pay Commission payouts, which are now beginning to spread through state governments and other components of the public sector, are being spent by the beneficiaries. If this is indeed the case, the fact that the process still has some way to go to achieve full coverage indicates that this momentum will persist for a while, continuing to contribute to the ongoing recovery. The other segment that has benefited from this source of demand is transportation equipment, which maintained a respectable 8.9 per cent growth in September. However, numbers published by the industry association suggest that cars and two-wheelers are doing significantly better than this; commercial vehicles are causing the drag. Notably, machinery and equipment, which reflects investment activity in the economy, has been performing quite steadily over the period of the recovery, continued up this path, growing by 16.5 per cent in September and by 11 per cent during the April-September period. The lagging sectors were, as expected, the ones most dependent on exports — textiles and textile products and the leather segment.

In all, 12 of the 17 industry segments in the manufacturing sector recorded growth, several of them in double digits. It would be reasonable to attribute this to a spreading, though still modest and uneven, recovery, which then has a direct bearing on the debate on exit from the various stimulus measures still in play. A strengthening recovery will make the Reserve Bank of India’s decision about reducing liquidity and raising rates a little easier as it can step up the emphasis on inflation control. The government can also breathe a little easier in view of the fact that a large chunk of the fiscal stimulus, viz., the pay increases, is permanent. It only needs to focus on the ineffective elements of the rest of the package.