The numbers for the Index of Industrial Production (IIP) for August 2009, released yesterday, reinforce the perception that the recovery is gaining strength. The June numbers provided the first sign of a better-than-tepid recovery, with the index showing 8.2 per cent growth (up from 2.1 per cent in May). In July, both the overall index and the manufacturing sector, which comprises about 80 per cent of the index, grew by a reasonably healthy 6.8 per cent (now revised to 7.2 per cent) over July 2008. The August numbers are significantly more buoyant, with the overall index growing by 10.4 per cent over August 2008 and the manufacturing sector coming in a shade lower at 10.2 per cent. This takes growth in the index for the June-August 2009 period to 8.6 per cent, which should set at rest any doubts that remain about the strength of the recovery. In the same three months of 2008, growth had averaged no more than 4.5 per cent. Then, the business cycle was turning down; now it is clearly turning up. The coming months could well see accelerated growth, helped by the low base of the corresponding months in 2008.
It is reassuring that the recovery is broad-based. Fourteen of the 17 segments of the manufacturing sector saw growth during August 2009, with seven of these 14 registering double-digit growth. The largest segment, Chemicals, accounting for almost 14 per cent of the index, grew by 14.7 per cent. Two important segments, Transportation Equipment and Machinery & Equipment, grew by 13.8 per cent and 14.2 per cent, respectively. The former’s numbers are borne out by data from the automobile industry, which indicate that long waiting lists are forming for some popular models. Most striking is the very significant turnaround in Textile Products, which includes garments. Badly hit by the fall in exports over the past several months, this segment clocked a 16.4 per cent growth rate over August 2008. Exports may have recovered slightly, but the bulk of this turnaround is attributable to a recovery in domestic demand. From the use-based perspective, Consumer Durables continued their remarkable run of the past few months, showing 22.3 per cent growth during August. This has generally been attributed to the increased spending power provided by the Pay Commission. Since the pay hikes are still being rolled out across state government and other public sector employees, the contribution of this segment to overall growth is likely to persist for some time.
From a policy perspective, the August numbers are both a relief and a challenge. For the finance ministry, buoyancy in production should increase excise tax revenues and the higher profitability that these numbers suggest will contribute to increases in direct tax collections. On the other hand, the Reserve Bank of India could well be on the threshold of raising interest rates and reining in liquidity. There are few expectations that this will be done during the next quarterly announcement, scheduled for end-October, but numbers like this may strengthen the case that sooner is better than later.