More good news

The November figures for the Index of Industrial Production (IIP), announced on Monday, may lead to a fresh burst of enthusiasm about how well the economy is doing.

It seems that there just cannot be any bad news on this front. But while the overall tone of recent developments has been unquestionably positive, it is prudent not to get carried away with the kind of spurt the November figures show.

Any monthly indicator is subject to a certain amount of volatility, often for reasons that cannot be fathomed. Last November, the index bucked the trend that had begun in July 2002 and dipped to a 4.1 per cent growth rate over the previous year.

As it turned out, November was an exception; since then, the index has held its head above the 6 per cent mark. Its biggest component, manufacturing, was responsible for this one-month negative spike. It spurted to 8.1 per cent in November.

Again, this simply marks a return to its average performance over the last four quarters or so, during which it has been clocking growth in the 6.5-7.5 per cent range.

All this is not to argue that the sector is not doing well. It is, indeed, compared to its performance two or three years ago. But some questions persist.

For example, it is quite clear that macroeconomic conditions are about as good as can be. Not one major indicator shows any signs of an impending threat. So, why isn't industrial growth responding to this highly favourable environment? Another source of concern is the apparent laggardness of the power sector.

According to the index, it has been consistently clocking growth rates of less than half those of manufacturing. This is indicative of a growing disparity between their activity levels.

From where, then, is industry getting its power? It is inconsistencies like this, some of which are admittedly due to the nature of the data itself, which support a cautious reaction to the growth numbers.

Looking at the some of the segments within the manufacturing sector, the half-full, half-empty picture again comes through. Consumer durables have not only rebounded from their dip of last year, they have overshot considerably, growing at over 12 per cent.

Clearly, the monsoons have had their impact on rural demand, but aggressive pricing combined with easy finance seems to be providing additional stimulus to demand. The wealth effect generated by the stock market boom couldn't have hurt either.

A very positive signal comes from the capital goods sector, which has been propelled by the performance of the transportation equipment sector until a couple of months ago.

This continues to flourish, but the machinery and equipment sector has been gaining ground in recent months, and it continued to do so in November, reinforcing expectations of an investment recovery. However, consumer non-durables were sluggish, perhaps because they hadn't lost too much ground last year anyway, and basic and intermediate goods grew at a steady pace.

Yes, it's a recovery all right; but changing demand patterns and competitive conditions, particularly from imports, are things to watch out for.