Just a blip

It is early days to call in a verdict on the growth rebound witnessed in the October IIP output numbers.

While a better-than-expected growth rate of 8.2 per cent has been clocked on a low base and festive demand, the lynchpin for optimism has been largely provided by growth across sectors, barring mining and quarrying. This augurs well for the services sector which has expanded the slowest in the last 12 months to November. The tortuous pace of reforms, especially on the power front, have taken their toll on the manufacturing and services fronts, two bulwarks of the economy. Hence the uptick in industrial performance alone is purely optical, if not cosmetic, a function of the base effect.

Taken with the increase in headline inflation, the buoyancy in manufacturing and consumer durables will require stronger incentives to sustain itself – key factors moulding momentum in five industrial sectors which are still sagging will be drivers like a stronger rupee, further reforms pushes, and a interest rate cut by a cautious RBI next month.

These do not address the problem in its entirety but are investor-friendly and can reflect in the overall industrial production numbers in the second half of fiscal 2013. Auto sales numbers have not been encouraging and surprisingly, manufacturing growth has picked up largely on order backlogs and the base effect. If automobile sector continues growing slower, the effect will be visible in the December IIP numbers. Overall, the above factors coupled with high food inflation and persistent stagflation in the manufacturing, capital goods and services sectors show that manufacturing and core sector growth may not have really bottomed out, even though indications of a far from broadbased recovery are evident.

For now, the IIP and GDP growth targets are cause for concern, and a CRR cut by RBI looks unlikely as long as the current industrial slowdown is well entrenched and broadbased. Contrariwise, the nuances of industrial growth since June suggest that companies are acquiring a degree of comfort doing business in India and taking on the associated risks. But there has been a sizeable decrease in compliance with the regulatory and tax environment as revealed in SEBI’s recent list of defaulting companies and this is an area for India Inc and its investors to address; for, compliance is as important in ensuring industrial growth permanency as reforms.