Path of recovery

After the dismal growth numbers for manufacturing in the GDP data last week, the IIP numbers for November are encouraging for manufacturing and core sector growth -- two persistent painpoints for the economy.

Growth momentum in manufacturing, according to available figures, strengthened in November with new order flows, though parallelly, inflation pressures have accelerated both input and output prices.

Despite the pricing pressures plaguing Indian manufacturers, exporters in particular, output growth has picked up on rising export orders, coupled with supplier delivery times shortening. But a major constraint to maintaining manufacturing output growth will be the high levels of power outages plaguing industrial units in Tier 2 and 3 cities of northern and southern India.

Power reforms have been painfully slow to incubate. Allocations to state electricity boards often do not adequately cover even their operating costs, not to mention humongous debt.

The Centre’s debt recast plan needs further reviews by the states before it goes on the rails. In the interim, manufacturing and other core sector industries will bear the brunt of higher power costs and frequent outages. Electricity generation slackened to an eight-quarter low of 3.5 per cent in the second quarter of this fiscal, a reason for muted manufacturing growth. Higher output in November has meant that industries can keep their inventories lower, albeit rising input and output prices (to be passed on to consumers) thanks to higher energy and metal costs.

Merger and acquisition activity into November was vibrant but domestic manufacturing, agriculture and real estate sectors are still not attracting the big deals. The three billion dollar deals -- ONGC’s $5-billion buyout of Kashagan field, Diageo’s $2-billion deal with United Spirits and Gulf Oil’s $1.05-billion stake in Houghton International -- in November were all cross-border deals.

The much feared sideways growth of the economy needs further reforms momentum, and must be countervailed with higher offtake on the services and agricultural fronts. The third quarter GDP numbers did indicate a recovery in domestic investment, but on a sequential quarterly basis. The government should speed up the passage of pending reforms Bills in the current session of Parliament to improve investor sentiments in the interest of overall health of the economy.

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