The sharp fluctuations in the Index of Industrial Production over the past three months and the slowing of industrial growth to 5.3% in November 2007?the lowest in 13 months?are bad tidings indeed. One major contributor to the sharp decline is the high base-year figure?a time when industrial growth was at a decadal high of 15.8%. Also offering a modicum of comfort is the fact that the slowdown has so far been contained to just one segment, namely, consumer goods, where production has either stagnated or fallen in three of the last four months. Within that, the consumer durables sub-segment has been worst hit with production falling in six of the last eight months. So hard has been the impact that the contribution of consumer goods, which accounts for over a quarter of industrial output, to industry?s overall growth in the first eight months of the year has declined by a almost a third to just 16% over the last three years. But surprisingly, sagging demand for consumer goods seems to have had no impact on investor sentiment as evident by the surge in capital goods output by 24.5% in the most recent month, over and above the inflated base-year figure. Moreover, imports of capital goods have been growing at an even faster pace than domestic production.
This leads to the question, why has the demand for consumer goods slid so sharply when a sustained overall improvement in agriculture output?with growth close to 4% in the last three consecutive quarters?and high food prices should have helped bolster rural incomes and raise overall demand in the peak kharif marketing season? While high interest rates may be an important contributor to the decline in demand for consumer durables, it is difficult to explain the trends in consumer non-durables, considering that most experts blamed the inflationary flare-up in food prices to surging rural demand, thanks to higher incomes and the large funds being pumped into social sector programmes like the National Rural Employment Guarantee Scheme. So, right now it looks like lower interest rates and tax cuts are the only feasible way to prop up consumer demand and, thereby, breathe fresh wind into the floundering ship of industrial growth. Are messers P Chidambaram and YV Reddy listening?
