Transitory or sustainable?

Recovery depends a lot on government action

The Index of Industrial Production, or IIP, numbers for May 2014, published last Friday, showed the industrial sector growing at its fastest in almost two years - 4.7 per cent year-on-year. It does reinforce the perception that economic growth has bottomed out and the turn in the business cycle is imminent. Yet even as these numbers provide some relief, the prospect of drought looms. Sowing of kharif crops is currently estimated to be about half the normal levels, and if the monsoon does not pick up over the next few days, the outlook for agriculture - both from production and price viewpoints - will be negative. On the external front, while the conflict situation in Iraq has not had a material impact on crude oil prices - in fact, they have softened over the past few days - it is volatile and unpredictable, and anything could happen. The relatively positive response to several Budget initiatives may stir investment activity out of its slumber; but details and nuances have yet to be made clear and absorbed.

Looking at the relative performance across industry groups, the picture is quite uneven. Some have shown healthy growth, with the highest being recorded by the furniture and miscellaneous manufacturing category at 60 per cent. Basic metals, the largest group in the basket, grew by a reasonable eight per cent. Other segments that did well were tobacco products (37 per cent) and electrical machinery (33 per cent). In contrast, several groups showed sharp declines, with radio, TV and communication equipment declining by 40 per cent, and computing equipment by 29 per cent. Motor vehicle sales, which showed quite a rebound in June, did not do so well in May, declining by over seven per cent. Clearly, the reassuring growth in the overall index papers over a very widely dispersed performance across sectors - so not yet a sustainable upturn.

Whether the uptick is transitory or robust will partly depend on factors outside the government's control - such as the monsoon and oil prices. It will, of course, have to do whatever necessary to buffer the economy from their impact. An important lesson from the 2002 drought was the value of the highways programme in providing rural employment, which proved to be an effective safety net. All opportunities such as this need to be quickly activated, with the added support of the rural employment guarantee scheme. But, beyond this, several of the budgetary initiatives relating to infrastructure, private investment and employment need to be implemented with great urgency. A sustained recovery is very much in the hands of the government and its ability to clear the bottlenecks that have hindered investment activity. With the prospects of aggravated food inflation likely to keep interest rates frozen for a while longer than earlier anticipated, the government will, in fact, have to work doubly hard to provide growth stimuli. Its economic mettle will obviously be put to serious test in its first year.