The Index of Industrial Production (IIP) for November 2002, released on January 10, was bad news. Output growth fell from 6.6 to a miserly 3.7 per cent. Status quo ante? Back to grim calendar 2001, when industrial growth averaged just 2.6 per cent ? a period most believed to be plain aberrant. Especially once the drought of 2002 appeared not to have caused the havoc, the fear of which interested quarters had assiduously stoked. But the IIP numbers for November must give pause. Did the economy tank while we all slept?
Gross domestic product (GDP) estimates for the second quarter of 2002-03 released in end-December with its growth estimate of 5.8 per cent was greatly reassuring. It allayed fears of the dreadful noises coming out of Krishi Bhawan. Most were willing to dismiss this as position play, but who ever knows for certain? Price movement of agricultural produce, especially kharif crops during August and September, were the first indication that significant crop failures had not happened, barring coarse cereals. Sales of manufactured products also did not slow as had been feared. Output and sales reports for individual industries were also positive. Exports continued to expand at comfortable double-digit rates right up to November, as did tax collections. Put all of this together with the imprimatur of the government?s first Mid Year Economic Review, and it mostly was a matter of looking forward to a somewhat better 2003.
So what do we make of the November IIP? Industrial growth has collapsed in a month on earlier occasions. In November 1996, industrial growth plummeted from 8.8 per cent in the previous month to 2.4 per cent, and the first post-reform downturn was on. In 1998, growth fell from 7 per cent in February to 3.7 per cent in March ? the end of the first short-lived recovery. In 2000, the buoyancy of the year dissipated when industrial growth fell from 7.4 per cent in November to 3.6 per cent in December.
As against these three turning points, there is one exception. In 1999, industrial growth fell from 9 per cent in October to 4.5 per cent in November, but recovered thereafter to 8 per cent plus. And the month of November occurs three times of the four.
The IIP numbers, because of the way they are constructed, have an in-built bias for upward revision. Thus, October 2002 growth was revised up from 6.2 to 6.6 per cent. So, while it is a near certainty that the initial estimate of 3.7 per cent for November 2002 will eventually be marked up to somewhere over 4 per cent, the fact remains that if November marks a trend, then it will be mostly downhill in the near term. So, which were the industries that accounted for most of the down movement in November 2002?
Manufactured food product was one big contributor. This category which had averaged 12 per cent growth in the first seven months of this fiscal, contracted by 7 per cent in November. The likely cause? Sugar mills across north India had come in conflict with state governments over buying cane at the price fixed by the Centre, and not at the much higher one foisted by the states, resulting in the crushing season beginning late. Not a permanent loss here ? but something that shaved over 1 percentage point (ppt) of growth overall. The impact is disproportionately large because of the extreme seasonal nature of the sugar business. Lower petroleum refinery output in November, another temporary event, knocked off another 0.4 ppt of growth.
If we eliminate these temporary effects, we go straight to a level of 5.1 per cent, which post-revision could mean 5.5 per cent. Additionally, output levels of basic chemicals are running below their trend, while both apparel and metal products index values for October underwent significant upward revision, making a likely repetition in November probable.
Thus, on balance it would appear that the current trend of industrial output growth is closer to the 6.5 per cent level of July-October. That December numbers will be better and November 2002 turns out to be a blip like the 1999 incident, and not the other unhappy ones.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)