The index of industrial production (IIP) numbers for July provided some much-needed relief as far as the state of the economy is concerned. After a string of extremely low and even negative monthly numbers, the industrial sector grew by 2.6 per cent year on year, far exceeding expectations. As always, the question is whether this is a first indication of a sustainable, even if modest, recovery or just an aberration in an otherwise stagnant situation. In particular, given the perception that a depreciated rupee will provide a boost to manufactured exports, can signs of increased competitiveness be seen in a month in which the currency did drop quite sharply?
The disaggregated numbers usually provide some insight on, if not clear answers to, these questions. For a few months, even as the overall index suggested stagnation, the garments segment seemed to be performing spectacularly. It might be expected to benefit even more in the new currency scenario. While it did not grow as impressively as in months when the rupee was stronger, it was one of the fastest growing segments in July, clocking 44 per cent. However, as in previous months, there appears to be something of a contradiction between this and the performance of the textiles segment, in which production actually declined by 0.3 per cent in July. So, as before, one might wonder where the cloth to produce all those garments is coming from. The real surprise in the pack, though, was the electrical machinery segment, which grew by about 83 per cent in July, taking its growth for the April-July period up to over 30 per cent. This alone has taken the capital goods sector to a growth rate of over 15 per cent, in an environment in which all the other capital goods segments displayed virtually no or even negative growth. Since the overall growth rate of three per cent in manufacturing and 2.6 per cent in the general index is heavily influenced by these two segments, it is rather difficult to see this as an early indication of bottoming out.
The consumer price index (CPI) numbers for August were also released on Thursday. Inflation was at 9.52 per cent, marginally lower than the 9.64 per cent seen in July. As in recent months, food inflation has remained stubbornly high and, significantly, it is being driven by cereal prices, which rose by over 14 per cent year on year in August, while the prices of pulses rose by less than two per cent. Vegetables also contributed to the spike, rising by over 26 per cent. Many of these pressures may moderate given the good monsoon, but it must be emphasised that good, bad or indifferent monsoons, food inflation has been above or close to double digits for over five years now. It is a structural problem and warrants a structural response. Importantly, the prices of manufactured goods, as they are reflected in the CPI basket, continue to diverge from the much more visible moderation in the wholesale price index (WPI). As regards the implications of these data points for the mid-quarter review of monetary policy due on September 20, they are unlikely to change the predominant expectation that the status quo on policy rates will be maintained, barring some dramatic announcements by the US Federal Reserve Board next week alter that perception.