Stable but critical

IIP shows how difficult an industrial recovery will be

The index of industrial production (IIP) numbers for February 2013, published last Friday, showed the sector as a whole growing by a tiny 0.6 per cent over February 2012. In most circumstances, this would have been the cause for widespread handwringing and lamentation. But in today's India, the response was more one of relief than one of shock. This was because a large majority of analysts expected growth to be negative. It is tempting to interpret this kind of positive shock as evidence that the cycle has bottomed out and there is nowhere to go but up. Government spokespersons routinely provide this interpretation and there may be some legitimacy to it, given that the numbers for the past few months do not indicate any further deterioration. But the fact remains that mere stability is no guarantee of a sustained recovery, let alone growth acceleration. Some of the patterns displayed by the individual components of the index indicate both the persistence of structural barriers and the very volatile nature of the sector's current performance.

Take mining, for example. The segment as a whole showed a decline of 8.5 per cent relative to February 2012. This was despite the manufacturing sector growing by 2.2 per cent, which suggests that there was some growth in the consumption of minerals. The primary cause of the poor performance is the continuing ban on iron ore extraction, which is not only starving the domestic iron and steel industry of a critical input, but also leading to significant loss of export revenues, thereby aggravating the balance of payments problem. The apparent impasse between the judiciary and the government on the enforcement of environmental regulations is clearly taking its toll on economic performance. Looking at the performance of some specific groups and products, it is striking that the positive growth during the month was significantly contributed to by capital goods, which grew by 9.5 per cent over February 2012. This is clearly against trend, since virtually no industry is reporting any revival in investment activity. A closer look reveals that a large part of this came from "electrical machinery and apparatus, not elsewhere classified", which grew by 73 per cent over a year ago! And even with this spectacular performance in February, the industry saw production decline by 4.3 per cent during the April-February period. Is this another of the data errors that the index has been prone to? Or is it a sharp recovery in the industry, which may signal better times across the board?

Several other instances of sharp increases and declines can be pointed out. Perhaps, in the end, they cancel each other out, leaving the aggregate index as a true reflection of performance on the ground. If this is indeed the case, then the consumer price index (CPI) reading for March 2013, which was also published last Friday, reinforces the gloom. Although it is down slightly compared to last month, inflation is still above 10 per cent. As the Reserve Bank of India has been saying for some time, this significantly limits the monetary policy response to slowing growth. The ball is very much in the government's court, then, and the clock is running down very fast.