:: Editorial

The industrial index phenomena

Oct.15 : The unexpected jump in the Index of Industrial Production figures for August 2009 to 10.4 per cent  from 1.7 per cent a year ago (in August 2008) seems spectacular on the face of it. Fourteen of the 17 industry groups registered robust growth. But a closer look at what is being labelled as a 22-month high will show that it is not as stellar a performance as the numbers project because this jump is on an extremely low base made at a time when the global economic crisis was nearing its peak. It is an issue of high base and low base and has to do with the numbers game. It is a numerical phenomena that proves that on a low base it is easy to show high growth and, conversely, on a high base it is easy to show low growth. This means that the September IIP figures could be lower as the base in September 2008 was six per cent. The capital goods sector, for instance, has done very well at 21 per cent in September 2008. Capital goods contributes nine per cent to the IIP. The point is whether for September 2009 it will be able to maintain this growth. The answer to this will show the real trend of growth in most of the sectors that have shown stellar performance in August. A more rational way to look at industrial production would be to take the actual growth between April and August this fiscal, which was 5.8 per cent, against 4.8 per cent in the same period the previous year. The manufacturing sector, which is the centrepin of the economy, is expected to grow by eight per cent, according to the Prime Minister’s economic panel. Manufacturing contributes 80 per cent to the IIP. A heartening factor in August’s IIP figures is the broad-based growth in the textile sector, which includes cotton textiles, textile products and manmade fibres which had suffered the most in the economic downturn. Along with the leather and diamond industries, this sector had seen lakhs of workers thrown out of employment because of low demand for exports from India.

The upturn in industrial production figures, especially in areas like consumer durables and non-durables, auto, cement and steel etc., augurs well for the economy if it can be sustained. What is interesting is that the offtake in credit has not kept pace with industrial production, which depends to a large extent on bank funding. This indicates that business is once again resorting to foreign funding, particularly from qualified institutional buyers or qualified institutional placements and private equity. Last year, when there was a global credit squeeze, foreign sources of funding had literally dried up and domestic banks had to bear the full brunt of the demand for credit from business and industry. There was an outcry that banks were not giving credit and industry was being squeezed. The banks maintained that there was a credit offtake, though on a smaller scale, and that industry was feeling the pinch as it expected banks to substitute fully for the foreign funding sources that had dried up. The credit offtake figures juxtaposed with the IIP numbers now indicate that the situation has reversed. This is an interesting situation in the light of the credit policy to be announced on October 27. Does this new situation mean that banks will be flush with even more funds? The government’s borrowing programme is also nearing an end. This would mean more funds with the banks. If so, will the RBI have to impound some of this through an increase in the cash reserve ratio?