Up again

From July to September, the Index of Industrial Production displayed an extent of volatility it had not done for the past four years. July saw the overall growth rate decline to 7.1 per cent over last July, down from the 9.8 per cent growth recorded in June. The much-anticipated slowdown was finally here, people thought. That view persisted until the August numbers were released, when the index confounded the pessimists, growing by 10.7 per cent over August 2006. Then, the September numbers showed the index climbing by only 6.4 per cent, reinforcing perceptions that a slowdown was indeed under way and would be confirmed by the October numbers. Well, that was not to be. The October numbers, released on Tuesday, have not only not lived up to expectations of deceleration, they actually suggest something of a rebound. The Index grew by 11.8 per cent over October 2006, the fastest growth rate seen in the past nine months. This growth has been entirely driven by the manufacturing sector, which grew by 13.3 per cent during the month, though on a rather low base of 3.8 per cent in October 2006. This takes the growth rate of the overall index for the first seven months of the year to 9.7 per cent, and that of manufacturing to 10.4 per cent. This is hardly indicative of any loss of momentum.

The pattern across industrial segments is revealing. Wood products have continued their spectacular run, growing at almost 80 per cent, a rate that this segment has maintained through the year. In this sense, it has not contributed to the upsurge in the index. The main contributor is the segment with the largest weight, chemicals, which accounts for about 14 per cent of the index and grew by an impressive 15.6 per cent, far faster than the rate of earlier months. Another significant contributor is transportation equipment, which grew by about 11 per cent, in sharp contrast to the sluggishness of previous months. Machinery and equipment, a persistent driver of growth in the index over the past several quarters, has accelerated to a rate of over 19 per cent, suggesting that the investment boom continues regardless of the fears of a slowdown round the corner. The other standout segment is the residual 'other manufacturing industries', which grew by over 34 per cent, again a significant acceleration. The one segment which declined, by almost 20 per cent, is metal products and parts, which as a result has registered negative growth for the entire April-October period.

While it is impossible to infer that any industrial deceleration has set in, the increased volatility of recent months may well be pointing in that direction. The segments that show a sharp surge after months of sluggishness may be in the process of replenishing inventories and will reduce production levels as soon as this is accomplished. This is one reason to expect that November, even with the boost from Diwali shopping, will follow the July and September patterns. However, the good news is that investment activity remains buoyant, while the average growth rate for the year, notwithstanding the volatility, remains strong. Is this because of sound fundamentals or good policy? Perhaps a bit of both.