Business as usual

Policymakers will treat industry as struggling still

On February 9, the advance estimates of India's gross domestic product, or GDP, for 2014-15 suggested that the economy was doing a lot better than had been previously believed. In the new scheme of things, the manufacturing sector was estimated to have clocked a relatively respectable 5.4 per cent growth rate in real terms in the first nine months of the current year. Of course, the numbers produced by the new GDP series have raised questions about their consistency with indicators of credit, profitability and tax collection. The Index of Industrial Production (IIP) numbers for December, which were released on February 12, will undoubtedly add some fuel to that fire. They indicate that the overall index grew by 1.7 per cent year-on-year in December, taking its growth for the April-December period to 2.1 per cent. However, manufacturing, which accounts for over 75 per cent of the index, reversed the pattern. It grew by 2.1 per cent in December, but only by 1.2 per cent during the April-December period.

The difference between the two nine-month growth estimates is not entirely inconsistent. The GDP estimates are for value added, while the IIP ones are for production. If the former is growing faster than the latter, it means that producers are generating higher value addition from a given level of output. However, it could be argued that a higher growth rate in value added would imply an acceleration in profit growth as well. Policymakers both in New Delhi and Mumbai, thus, cannot ignore the still relatively sluggish picture presented by the IIP numbers. As has been the case over the past several months, the low overall growth rate is underpinned by a wide dispersion of growth rates across industries. Sectors like garments and furniture did reasonably well, growing at above 15 per cent, but office and computing machinery, and telecom equipment declined by about 34 per cent and 70 per cent, respectively. Sectors like basic metals and cement, good indicators of the business cycle, actually decelerated relative to their growth over the previous few months.

The other data release last week was the Consumer Price Index (CPI) for January. This index has been re-based using the consumer expenditure patterns emerging from the household survey carried out during 2011-12. The change means that the share of food in the basket has fallen marginally. However, the inflation rate reading of 5.11 per cent does not do anything to change the current assessment that inflation is on a steady moderation pattern. Importantly, the variation across different commodity and service categories in the index, including food, is relatively narrow. To the extent that prices of manufactured goods are reflected in the index, their rates of inflation are also in the five-six per cent range, suggesting that there are no specific pressures on the sector. A clearer picture will emerge with the release of the Wholesale Price Index (WPI) on Monday, but, for the moment, it will no doubt be business as usual at the Reserve Bank of India and the finance ministry.