Patchy recovery

The improved IIP figures should not make RBI sit on its hands.

The latest figures for the index of industrial production, or IIP, were released on Thursday, and took most observers by surprise. The IIP for October 2011 had shrunk by 5.1 per cent (revised now to 4.7 per cent); for November, it has now risen by 5.9 per cent, a considerable upswing. This has encouraged the official spinmeisters to hope that the Indian economy is bottoming out and headed for recovery. The deputy chairman of the Planning Commission, Montek Ahluwalia, has said that he expected that the “slowdown in industry will basically come to an end during the third quarter of the financial year”. The chairman of the Prime Minister’s Economic Advisory Council, C Rangarajan, has echoed that assessment. Such official optimism used to be trotted out regularly when it came to inflation; now the focus is on talking up growth. Perhaps the purveyors of the government view are encouraged by the fact that the purchasing managers’ index had shown an uptick for December. There are, however, questions of seasonality to be taken into consideration. For example, Diwali in 2010 was in November, whereas in 2011 it was in October. Holidays in the Diwali season usually affect the level of industrial production.

Examination of the notoriously volatile IIP number should be supplemented by looking at the series’ overall trend, and by decomposing a month’s figure. If this exercise is applied to the November figures, it becomes clear that two factors in particular have boosted them. First, and very noticeably, electricity generation was up 14.6 per cent — a performance that is certainly not sustainable even without the raw material constraints and financial stresses that have surfaced in the sector; and, second, consumer demand too has held up very well, growing over 13 per cent. On the other hand, capital goods production continued to shrink, by 4.6 per cent. That should concern policy makers. Additionally, any growth in the production of intermediate goods was so small as to be hardly noticeable. Basic goods did well (up 6.3 per cent), but somewhat contrarily mining output continued to drop, by 4.4 per cent, following on from a fall of 7.2 per cent in the previous month. In other words, the November recovery is patchy. Even if there is a further industrial recovery in December, it is hard to see GDP growth for the third quarter of the financial year topping the 6.9 per cent recorded in the July-September quarter, or the so far slow demand for credit seeing a quick pick-up.

The key question for next week is what message the Reserve Bank will read into these numbers. If Mint Road reads them as optimistically as Yojana Bhavan does, the central bank will be confirmed in the view that it has projected in recent weeks — that interest rates should not be raised any further, but nor should they be lowered just yet. At a time when the next monthly price index is generally expected to show inflation dropping handsomely from nine per cent to about 7.5 per cent, such a “wait and watch” policy will be of little help to whatever upswing there is in industrial activity.