Editorial: Undue optimism?

The Index of Industrial Production (IIP) for May 2008, released last month, shocked many observers when it showed a growth rate of less than 4 per cent. This sharper than expected dip reinforced concerns that the restrictive monetary policy regime was taking a heavy toll on growth, even as it struggled to gain control over inflation. It intensified the debate between proponents and opponents of the current monetary policy stance. However, alternative evidence emerging from direct surveys of producers by two national industry associations, the Confederation of Indian Industry (CII) and Federation of Indian Chambers of Commerce and Industry (Ficci), appears to challenge the perception that industrial growth is tapering off. In striking contrast to the IIP numbers, both surveys suggest that a significant number of industrial segments grew by healthy rates of over 10 per cent during the April-June quarter. In the CII survey, output in 47 out of 100 segments covered by the survey grew by over 10 per cent. Another large proportion of responding companies indicated that their output grew by over 10 per cent. Of course, there were 21 segments in the CII survey which showed output declines during the quarter. However, the overall picture is certainly not as downbeat as the IIP numbers suggest. Based on its own survey results, Ficci in turn estimates that industrial output will grow by 9.5 per cent during the current year, significantly above the current range of estimates from most forecasters.

 

Questions can be raised about how representative the surveys are. However, the same criticisms have been aimed at the IIP, which provides no guarantee that the same companies are submitting production figures month after month. The surveys go one step further than the IIP in being able to capture some of the underlying drivers of current and likely performance, as perceived by the respondents. From this perspective, the Ficci survey suggests that the longer-term outlook of producers remains optimistic, and significant investment activity as well as mergers and acquisitions is taking place as a result. Further, the effects of the boom of the past few years persist. The demand for high-end consumer products remains robust on the back of rapid growth of incomes during these years.

If the Reserve Bank of India were to put greater weight on these numbers than on the IIP, it would certainly feel vindicated in the decisions on interest rates and the cash reserve ratio that it has taken during the past couple of months. The dilemma of having to sacrifice growth in order to tackle inflation, which was highlighted by the IIP numbers, is much less visible in the survey results. If growth is not slowing down as a consequence of tighter money, then there is little doubt that further tightening is necessary to rein in inflation. However, such a course has its dangers; the widespread concern amongst industry leaders about the interest rate hikes being excessive suggests that, whatever the first quarter performance may indicate, the immediate future for industrial output is none too rosy. The June IIP numbers, to be released next week, may help to reconcile the differences between the two sources. Meanwhile, it is important to point out that, while the concerns about a slowdown may be exaggerated, they remain legitimate.