Consolidating recovery

But its unevenness indicates fragility and risks

The Index of Industrial Production (IIP) numbers for September, released on Wednesday, show that output grew by 2.5 per cent year-on-year. Manufacturing, which accounts for about 80 per cent of the index basket, also grew by the same rate. For the first half of the current year then, manufacturing growth was two per cent over the corresponding period of the previous year, while the overall index expanded by a slightly faster 2.8 per cent. Ordinarily, such numbers would not induce much excitement, but given the virtual stagnation of the industrial sector over the past couple of years, positive, even if low, growth being sustained over a six-month period should provide some comfort. For several months now, it has been quite clear that a firm bottom had been reached by the business cycle; now, there are growing indications that the economy is finding its way out of the trough. How far up it can reach is a serious question, but for the moment, an upturn in the cycle seems to be under way.

The performance of different industries also supports the recovery story, but does underline its unevenness across sectors, which is an indication of fragility and risks. Among key cyclicals, basic metals and motor vehicles performed respectably, growing by over 12 per cent and nine per cent year-on-year respectively. However, cement, also a good indicator of the state of the business cycle, was sluggish at less than one per cent, after a few reasonably good months. As regards capital goods, electrical machinery grew almost 30 per cent, a strong performance by a relatively large segment, but office and computing machinery did miserably, declining by almost 35 per cent. Overall, capital goods did reasonably well, growing by over 11 per cent in September and by almost six per cent during the first half of the year. The real laggard is the consumer durables sector, which declined by over 11 per cent in September; the only saving grace being that this was a slightly slower decline than the first half fall of over 12 per cent. Evidently, the recovery is not yet robust enough to get consumers to make big-ticket purchases.

Looking ahead, a significant factor in driving both overall growth and that of consumer goods in particular will be the steady decline in fuel prices. If oil prices stay at current levels for some time, consumers will have a larger capacity to spend on other goods and services. If, as is widely expected, the Reserve Bank of India begins to reduce interest rates over the next few months, this will reinforce the recovery both through consumer spending and some channels of investment. Of course, a more rapid and sustainable recovery will be contingent on a strong turnaround in investment activity. This is where some significant risks still lie. For one, infrastructure is still in woefully short supply. Faster clearances of projects are only one part of the solution; projects still have to get executed. For another, banks' balance sheets are impaired, significantly due to exposure to stalled infrastructure projects. This is hindering their ability to lend to their traditional borrowers, whose demand for credit will expand with the recovery. Credit constraints could put an unnecessary brake on the incipient recovery. Solutions have to be found, and quickly.