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Don't celebrate yet

Despite a pickup in October IIP, slowdown isn't over

Business Standard  |  New Delhi 

The Central Statistics Office has released the quick estimates of industrial production for October this year, and they have startled most observers. The overall index of industrial production, or IIP, has risen 8.2 per cent when compared to October 2011. Of course, October of 2011 was a particularly bad month for the IIP — it shrank just under five per cent on a particularly poor performance from the capital goods sector. However, even so, most observers had expected a considerably lower number for IIP growth year-on-year. Even looked at sequentially, the October 2012 IIP shows a significant jump over the index in the previous month, September. What’s made the difference is 9.6 per cent growth in India’s hitherto stagnant manufacturing sector. That’s definitely as unexpected as the double-digit growth seen in the consumer goods sector, which had clearly bounced back after contracting in September.

However, it would be hasty to conclude on the strength of these figures that India’s industrial sector, having bottomed out, is on the road to recovery. A similar spurt, though much lower, was visible at 6.1 per cent in November 2011 and later at 4.2 per cent in February 2012 — but both the figures flattered only to deceive. Also, although capital goods appear to have gone up by 7.5 per cent year-on-year, that’s because October 2011 saw a precipitous decline in capital goods production. Compare October 2012’s capital goods output to November 2011 instead of October 2011, and it is actually 5.7 per cent lower this October. Indeed, capital goods output, when looked at sequentially, has registered a decline of almost three per cent between October 2012 and the previous month. That’s not the sign of an economy that’s on the brink of a sustainable recovery.

It is important to note, also, that other indicators of macroeconomic momentum are not so positive. Consumer price inflation for November was up, at 9.9 per cent. Exports have disappointed expectations, falling for a seventh consecutive month. Indeed, they fell by 4.17 per cent in November 2012, a much sharper fall than in October. Worse, imports have continued to rise year-on-year, at 6.35 per cent for November 2012 (though they did register a sequential decrease of almost six per cent over imports for October 2012). This means that the trade deficit for November 2012 was 22 per cent higher than it was in November 2011 — a worrying sign indeed for macroeconomic stability. The government’s current account deficit targets look increasingly unachievable. The slowing economy is reflected, too, in the government’s lower-than-expected tax collections so far this year, which will adversely affect its efforts to control the fiscal deficit.

The United Progressive Alliance government has often jumped on good news or surprisingly positive numbers in order to talk up the economy’s revival and its future prospects. This, all too often, takes the place of sustained movement towards reform. These numbers for October industrial growth should not be the occasion for another such error.

First Published: Thu, December 13 2012. 00:05 IST