Anatomy Of A Slowdown

The general index of industrial production (IIP) which comprises mining, manufacturing and electricity, shows a slowdown. A three-year moving average of the monthly rate of growth of the index brings out the decelerating trend quite clearly. Starting some time in mid-95, the rate of growth has been on the downswing, even though there was a marked improvement in May this year.

Uninterrupted secular rise in any economic variable is a rarity, if not an impossibility. Fluctuations are part of the dynamics of the growth process. But it is instructive to note that in the time series plotted in the graph, the peaks are getting higher, while the troughs are not getting deeper. This is one way to discount the onset of recession.

If the distribution of this decline in the IIP is analysed, it becomes evident that the source of the decline lies in electricity and mining and not the manufacturing sector. The accompanying graph clearly brings out the disjuncture between the moving average of the general index and that of the manufacturing index during 1995-96.

In mining, the rate of growth has declined from 17.4 in June last year to 6.8 per cent in May this year. The performance of electricity is even worse. After having peaked at 14.6 per cent in June last year, the current rate of growth is barely 3.5 per cent.

After a two-month dip, manufacturing is on the up with a growth rate of 14 per cent. The pick up in May, which is evident in other important segments also, is significant in view of the fact that these series are highly seasonal. And seasonal factors are working against the trend growth at this time of the year. The trough values of most of the IIP series occurs in May, in addition to September. If the series is deseasonalised the rate of growth in May over the corresponding period last year is closer to 16 per cent. The important point is that industrial growth is being sustained by the manufacturing sector alone. The spread of industrial growth is shrinking and this is not sustainable.

However, this trend is compensated by a more evenly spread growth within the manufacturing sector, as shown in the graph. The smart recovery of the intermediate industries whose contribution is up from 9 per cent to 25 per cent is noteworthy. The use-based classification of IIP shows that capital goods industries have maintained their contribution to the overall growth of 14 per cent.

In a sense, industrial growth is not as dependent on consumption goods sector as it is was a year earlier. It is increasingly being driven by investment demand. Given that the linkages are much higher for those industries which are farthest removed from the consumer, this pattern of growth can set in motion mutually reinforcing growth impulses for a broad-based and sustainable industrial recovery.p"-->