Are the green shoots growing? The 2.7% figure for the index of industrial production in May has surprised everyone. The highest industrial growth since September 2008, when the global financial crisis hit, May?s figure is almost double what informed opinion had expected. However, a closer reading of the data reveals more nuanced and less reassuring aspects. Industrial growth seems to be driven by consumer durables and related segments. Investment, the prime growth driver in recent times?as even the Budget?s introductory remarks acknowledged?has not shown any significant sign of a pick up. Also worth highlighting is the continued patchy performance of sectors that produce articles of daily consumption. In consumer durables, growth had first picked up, hitting 5.5% in the last quarter of 2008-09 and then further accelerated to 14.7% in the first two months of 2009-10. The sustained momentum in the consumer durables segment seems to have been transmitted to the intermediate and basic goods segments, which together account for close to two-thirds of industry. Production contraction in the intermediate goods sector in the last three quarters of 2008-09 has been reversed, with the segment posting a healthy 6.7% growth in the first two months of the current fiscal year. Similarly, the 4.7% and 3.8% growth registered by the basic goods sector in April and May were the highest since last September. As has been noted, government revenue expenditure, primarily via Pay Commission awards, came at the right time for durables, and the demand boost was impressive enough to lift activity in other sectors. But how long will this effect last? Not for very long, obviously.
Therefore, the big questions are what signals on spurring capital formation and consumption are going to be available. Will the Budget help? The performance of consumer non-durables is relevant to these questions. The segment that supplies items of mass consumption has performed badly over the last four months. Though improved income during the rabi marketing season seems to have reduced the shrinkage in production from a peak of 9.1% in April to less than a third in May, the fall in demand is still too large to be ignored. With the monsoon weak in large parts of the country, it is crucial that Budget allocation for rural schemes is spent well and quickly. On private investment and broader consumption, the Budget?s possible effects are a matter of heated debate. Being sceptical seems the smarter choice. In any case, the cost and supply of credit remain as important. Domestic policy will have to make up for the lack of a benign global environment. That means more reforms and lower lending rates.
