Reluctant recovery?

For those who recall the heady days of the mid-1990s, it may be something of a mystery as to why there is so much hoopla about current industrial performance.

For 19 successive months, from December 1994 until June 1996, the month-on-month rate of growth of Index of Industrial Production (IIP) for manufacturing was into double digits.

By contrast, in the current revival, which many people have been touting as the coming-of-age of Indian industry, the growth performance has been in the mid-range of single digit numbers.

In July 2002, the index for manufacturing crossed the 6 per cent mark after (coincidentally) a gap of 19 months.

From then until October 2003, the latest month for which figures have been published, it has hovered in the 6-7 per cent range, with occasional exceptions. By the standards of the mid-1990s, this is pallid.

But look a little deeper into the performance of individual industries, and it is not hard to solve the mystery. Over the last 16 months, the current recovery has been driven by a select set of industries.

Over the course of the recovery, three industries "" transportation equipment and parts, basic metals and food products "" have contributed significantly and consistently to industrial growth.

Other industries have made significant contributions for one or other stretch of months, but have not endured.

Therefore, apart from the top three, in any given period, two or three others contribute substantially to overall growth, but this list keeps changing every few months. Yet others have made consistently small, or even negative, contributions over the course of the recovery.

The relatively narrow range of consistent performers clearly has something to do with the nature of the stimulus to the recovery.

All indications are that the current revival is being driven by two major factors. Falling interest rates have provided a significant stimulus to housing construction and the sales of automobiles (including commercial vehicles) and consumer durables.

The stimulus to construction has been reinforced by the progress of the highways programme. And construction, being as labour-intensive as it is, generates a lot of wage income and, consequently, demand for the lower-end consumer goods, many of which are in the foods category.

Broadly speaking, these linkages explain the pattern of industrial recovery that is being seen now. The absence of any other persistent drivers explains why the performance of several other industries is relatively volatile.

This is where the contrast with the mid-1990s is striking. That industrial boom was driven by a powerful combination of three drivers "" a long period of stability in agriculture, contributing to buoyant rural markets; a surge in exports, following the devaluation of the rupee in 1991 and a booming global economy; and, a massive investment drive in domestic industry.