Estimates for India’s industrial production were released by the Central Statistics Office of the ministry of statistics and programme implementation on Friday, revealing that the index of industrial production, or IIP, for November 2012 was 0.1 per cent lower than it had been for November 2011. The government responded by pointing out that festival dates can impact industrial production; in 2011 Diwali was in October, and in 2012 in November, meaning that there was a base effect to contend with. There is some truth to this observation; if industrial output in the two months of October and November 2012 is compared together with the same two months of the previous year, it is four per cent higher. Yet the contention that this inevitably reveals that the economy has bottomed out, and that government action is working, is highly debatable. The detailed figures reveal more than enough reasons for unease about those propositions.
The most worrying indicator is capital goods output. Remember, capital goods are a leading signal for the overall manufacturing sector; they are more volatile than overall manufacturing, and respond to expectations about future demand for industrial products. Capital goods output in November 2012 shrank both sequentially, compared to the previous month, and by 7.7 per cent compared to output in November 2011. Cumulatively, for October-November 2012, it shrank marginally. Indeed, for the April-November period, capital goods output shrank a sizeable 11.1 per cent. The outlook for the future, therefore, continues to be bleak. Overall manufacturing has sustained its low level when compared to earlier months in 2011. Last year saw an uptick in December; but that followed months of higher capital goods production, too, unlike this year. So the government’s firmly expressed belief that the recovery will be amply visible in the December IIP figures should be taken with a pinch of salt. The numbers clearly indicate that whatever recovery is visible is consumer demand-led – consumer goods have grown, again – rather than investment-led. It depends, thus, on high spending, which may be unsustainable.
What are the implications for North Block and for Mint Road? The Reserve Bank of India (RBI) will review monetary policy on January 29, and the pressure on it to press forward with monetary easing will be considerable. Of course, it will also depend on the figures for inflation in December 2012, to be released on Monday. However, the government cannot continue to wait for the RBI to correct policy. Some recent signs of activity from the government – setting up the Cabinet Committee for Investment, for example, and the clearance of the land acquisition Bill by the Cabinet – are welcome. But they are already long delayed and need to be operationalised without any more delay. Big projects must get rolling; order books need to start filling. Otherwise the malaise in investment will spread again to overall manufacturing, infecting even consumer demand. The risks of an even sharper slowdown are not absent, nor has government action been firm or speedy enough to guard against them. More is needed from New Delhi, and the urgency of recent statements should be matched with action on the ground.