What recovery?

The spike in the index of industrial production (IIP) for November was a matter of surprise considering that it had shown a negative growth the previous month. The rise of 5.9 per cent contrasts starkly with the negative 5.1 growth in October. There are other indicators of recovery like the increase in the government’s tax revenues and a handsome rise in the purchasing index. But it is still doubtful if the new signals point to a turnaround in the economy. Seasonal factors may have contributed to a better overall performance of the industrial sector. Consumer spending was high in November as festival season was coming to an end. This is indicated by the big contribution of consumer durables and non-durables to the rise in the index. It should also be noted that there was no loss of production in November because most of the festival holidays were in October. Power generation, which marked a near 15 per cent improvement, also helped strengthen the index. But the performance of the power sector may not be sustainable in the coming months for various reasons.

A close look at the disaggregated figures of the index shows that the main elements of the slowdown trend persist. Capital goods production and mining, which are perhaps the most crucial sectors, have shrunk by nearly 5 per cent. Both these sectors have been underperforming for months and till the time they reverse the trend there cannot be hope of a firm recovery. Capital goods sector is the most important indicator of investment activity. Though the November lag may be partly because of a high base effect compared to last year, the slippage which has continued in the past few months indicates the persistence of slowdown.

The high level of volatility in the index from month to month and the highly uneven performance of various sectors also show that a stable outlook of growth may not be realistic in the near future. The three-month average of the growth in IIP is just over one per cent against 7 per cent at the beginning of last year. There are signs of inflation softening but this is largely because the food price index has fallen in relative terms. If investments do not pick up, the hope on the inflation front may also be belied. There is a need to wait further for a definitive trend to emerge.