Editorial: Confirming the slowdown

As happened during the first half of last year, the growth rate of the manufacturing sector is itself relatively skewed. In 2007-08, unprecedented growth in the wood and wood products and the food processing segments kept the index buoyant, even as some of the more heavily weighted segments were clearly decelerating. This time round, while those segments appear to have come down to earth, registering sharp declines during April-May 2008, the beverages and tobacco segment has accelerated sharply, growing by over 30 per cent during the first two months. Given this skew, it is far more revealing to look at how some of the more important manufacturing segments are doing. Textiles and textile products are sluggish at 2-3 per cent. Chemicals, the largest individual segment, are doing well, with over 12 per cent growth during April-May. Significantly, transport equipment, which was sluggish through much of 2007-08, seems to have staged a recovery this year, growing at almost 12 per cent during April-May. On the other hand, machinery and equipment, a critical indicator of the level of investment activity in the economy, after performing relatively well through 2007-08 when other segments were decelerating, slumped to below 5 per cent in May, taking its two-month cumulative growth to 5.7 per cent. This is also reflected in the use-based capital goods segment, which grew by a mere 2.5 per cent during May, indicating that commercial vehicles, which are the other major constituent of this segment, hardly grew at all. The metals segments have also been rather sluggish; high prices are taking their toll on demand. Overall, these patterns suggest that, while not all major segments are trouble, the turbulent economic environment is taking its toll.

 

However, the patterns need to be put in proper perspective. They are entirely consistent with the two most important macro-economic forces at work today. One is the level and persistence of oil and other commodity prices. The other is the anti-inflationary stance of monetary policy. Both will combine to slow down growth, which in turn combines with other forces to rein in inflation. How long the process will take is anybody's guess, but at least it seems to be in motion. It should not be forgotten that all cycles comprise a downside and an upside. As of now, the economy does appear to be in a cycle, so the deceleration will inevitably be followed by an acceleration. How quickly and how strongly will, of course, depend both on global developments and domestic policy responses.