You are here: Home » Economy & Policy » News
Business Standard

Recent IIP data show recovery signs

IIP has registered positive growth over the past few months on the back of a revival in the manufacturing sector

Ishan Kumar Bakshi  |  New Delhi 

Image via Shutterstock

While it could take a while before a full-blown recovery of the economy could be reported, recent data on key economic indicators indicate that an incipient recovery is underway. The index of (IIP) has registered positive growth over the past few months on the back of a revival in the manufacturing sector.

The seems to have moderated and trends in line with the Reserve Bank of India's (RBI) target of eight per cent by January 2015. However, a below-normal monsoon and higher oil prices owing to the ongoing West Asia conflict could play spoilsport.

The recently-released estimates of the index of eight core industries also point to a revival with the index growing at 7.3 per cent in the month of June, the fastest since October last year.

ALSO READ: Manufacturing PMI rises to 17-month high in July

On a quarter-on-quarter basis, the index grew at 4.6 per cent, compared to 3.7 per cent in the earlier period. With the index accounting for 38 per cent of the IIP, it is likely that this growth spurt might reflect in the coming months' numbers.

At industry-level, while growth in electricity production has been erratic, the latest estimates show the sector grew at a scorching pace of 15.7 per cent in June, compared with 6.3 per cent in the previous month.

Growth in this sector was closely followed by cement, which grew at 13.6 per cent against 8.7 per cent in the previous month. The sector, which witnessed lacklustre performance over the past year, has shown signs of a revival over the past few months. In addition to the overall slowdown in the economy, growth in the sector could have been negatively impacted due to recently-concluded elections.

In their paper quid pro quo: Builders, politicians, and election finance in India, Devesh Kapur and Milan Vaishnav have argued that around elections, real estate developers “need to re-route funds to politicians as a form of indirect election finance”. The authors show that cement consumption, a raw material, reduces during elections, thus exhibiting a “political business cycle”. Going forward, in addition to the overall improvement in the macro-economic scenario, greater policy clarity over real estate investment trusts (Reits), expected to boost the construction sector, is likely to provide a fillip to the sector.

Coal production, which has over the past few years suffered on account of various legal entanglements, has grown consistently for the past three months, with June growth estimated to be 8.1 per cent. Natural gas continues to remain in the negative territory, with production falling 1.7 per cent. While the sector has failed to register positive growth in any month in the past year, the pace of contraction has tapered off. Policy uncertainty over gas pricing continues to plague the sector. With the new government postponing its decision on the price formula proposed by the Rangarajan committee, the sector's woes are likely to continue till some clarity on the pricing policy emerges. In addition to the recent numbers indicating a revival in manufacturing, the HSBC's purchasing managers index (PMI), too, climbed to a 17-month high of 53 in July, signalling improvement in the business environment. Interestingly, while the report points out that companies have scaled up production in response to robust demand, inflationary pressures continue to emerge.

On the demand side, the report states that growth was driven by “flood of new orders” from both domestic and overseas companies. This reaffirms signals from the data that seem to indicate a pick-up in export demand. Going forward, export demand is likely to be robust with the latest US GDP numbers indicating that the economy grew at four per cent on an annual basis and with the IMF (2014) also expecting global growth to rebound from the second quarter of 2014.

Thus, a pick-up in export-led manufacturing, coupled with a revival in the core industries, could signal a steady performance on the IIP front. Surprisingly, on prices, the report indicates input price pressures have risen sharply with cost pressures being witnessed “across each of the manufacturing sub-sectors”. A pick-up in demand, which could lead to manufactures passing off higher input prices to consumers, could lead to an uptick in inflation numbers. In such a scenario, it is quite likely will maintain a status quo while announcing its monetary policy next week.

First Published: Sat, August 02 2014. 00:49 IST