Will upbeat numbers hold?

Agriculture threatens to offset industry`s early momentum

The numbers for the Index of Industrial Production for June 2009, published yesterday, indicate quite clearly that the early signs of a recovery in the previous month were no flash in the pan. The overall index grew by 7.8 per cent over June 2008, hardly symptomatic of sluggishness. All three components of the index registered impressive growth rates. Mining grew by 15.4 per cent, Manufacturing by 7.3 per cent and Electricity by 8 per cent. These numbers talk of a clear recovery, and take the growth numbers for the April-June quarter to much more reassuring levels. Looking at the more disaggregated picture, 12 out of 17 industry segments registered positive growth, a proportion that has been steadily climbing over the past few months. There were some lopsided figures, though, with Other Manufacturing Industries, a highly diversified set, and Wood & Wood Products growing by about 32 per cent and 26 per cent, respectively. On the other hand, Metal Products, an important industry segment, showed a decline of over 8 per cent. From the use-based perspective, the driver of this performance was Consumer Durables, which grew by 15.5 per cent, continuing a streak that began three months ago. This is being attributed largely to the boost in the incomes of public servants, helped along by higher rural incomes, which in turn resulted from higher procurement prices and loan waivers. In both cases, fiscal measures appear to have played a significant role in boosting demand.

The critical question is, will the turnaround persist? Even as industrial activity appears to be picking up, news about the failed monsoon has begun to lower expectations about growth during the current year. There has been deficient rainfall in most parts of the country. The only saving grace is that it has been least deficient in the least irrigated parts, which means that the availability of irrigation, particularly in the snow-fed northern river basins, will offset some of the potential loss of production. But, for the central and southern states, there are bound to be lower rural incomes, not to mention higher prices of many important food and non-food items. Tur dal prices are sustaining at record levels, something that will not go down well in several parts of the country. From the perspective of the recovery, the situation augurs rather badly. One, lower rural incomes will impact consumer spending and, consequently, non-agricultural production. Two, higher food prices will squeeze household budgets, also reducing spending on other items. Three, inflation that is spurred by persistently high food prices may force the Reserve Bank of India to begin raising interest rates earlier than is warranted by general economic conditions. And finally, drought relief will evoke demands for central government financial support, putting further pressure on an already stretched Budget. In sum, the problems in agriculture will spill over into the other sectors of the economy, and this raises concerns about the sustainability of the recovery.