Crying Wolf Again?

Definitive judgement on these issues is always difficult because of two problems: the index of industrial production is hopelessly out of date (few figures are available after May) and does not give sufficient weightage to the emerging sectors, like consumer durables "" which have a laughable weightage of 2.5 per cent in the index, when the reality is probably about three times as much. This could be one reason why the industrial production index for May shows 11.5 per cent growth, which is healthy by any yardstick. By the time the index has the numbers for August-September, the picture may be clearer. Also, qualitative judgement suggests that consumers are less willing now to buy on credit, when the interest rates are so high; that many of them may be fully leveraged because of past debt; and that the falling share and property prices have taken away the feel good factor which encourages spending. Indeed, because of all this, consumers may be busy salting away their money, either in new savings instruments (interest rates are high, after all) or in order to repay past debt.

 

If one goes strictly by the numbers that are available, the evidence of recession is confusing and not entirely convincing. The manufacturing sector continues to be buoyant with a growth rate of almost 14 per cent in May, while mining (which peaked at about 18 per cent) has slowed to 6.8 per cent. Similarly, electricity has decelerated to 3.5 per cent after having registered close to 15 per cent growth in June last year. Within manufacturing, the capital goods sector has maintained its buoyancy to grow in May at well above 18 per cent. Basic goods with a growth rate of 8 per cent and intermediate goods with 13.6 per cent have also performed better than in the last quarter. The growth of 11.4 per cent in consumer non-durables is in fact the highest since May 1995. But consumer durables have slowed down sharply to, 8.3 per cent.

Where the problem is already in evidence quite clearly is in the core sector. According to the estimates for June, electricity generation declined in absolute terms by 2 per cent, and crude petroleum registered a fall of as much as 13 per cent. But this pattern of decline, in the core sector, suggests constraints in terms of production bottlenecks or inadequate investment, rather than consumer demand. The Eighth Plan focused essentially on infrastructure in the social sectors, and neglected the physical infrastructure on the premise that private sector investment would make up the slack. This did not happen, especially in electricity, which is perhaps the worst hit sector just now. But such constraints cannot be alleviated in the short run.