The Index of Industrial Production grew 5.7 per cent in May. In 2002-03, the growth of the index had been 5.8 per cent, so the overall trend in 2003-04 seems to be broadly along the same course. Manufacturing, which accounts for nearly four-fifths of the index, fared better than has industry overall. In 2002-03, the manufacturing component of industry grew by little over 6 per cent while growth in May 2003 was 6.1 per cent. April 2003 at 4.4 per cent was worse but that was the outcome of the truckers? strike. June 2003, the numbers for which are to be released next month, was most likely similar to May. Thus, as matters stand presently, manufacturing growth at close to 6 per cent for the rest of the current fiscal (2003-04) is a fair presumption.
Then there is the South West (SW) monsoon which has been rather generous this far. Up to 17 July 2003, monsoon rainfall was 8 per cent over average and as many as 31 out of 36 meteorological divisions had excess or normal precipitation. While extensive flood damage is always a possibility, it is fairly safe to bet that, notwithstanding all such damage, agricultural output this year in both the kharif and rabi season is going to approach or exceed all previous records. From this many have concluded that there should be a strong positive effect on the demand for manufactured goods and hence stronger industrial growth.
It is, however, prudent to approach any such conclusion with caution. The base of industrial growth has if anything become even narrower in recent months. Thus as against total manufacturing growth of 6.1 per cent, just four (out of 17) industry groups ? with a combined weight of 29 per cent in the manufacturing index ? accounted for as much as 5.6 percentage points of growth. In other words, the remaining 13 industry groups ? with a combined weight of 71 per cent ? accounted for a mere 0.5 percentage points of growth. The four out-performing groups were food products, beverages & tobacco, basic metals and transport equipment.
If we look at industrial growth from the use-based side, we observe the principal impetus to growth coming from consumer goods whose production (and therefore demand) has been growing at a rate in excess of all other types of goods. What is even more remarkable is the continuous improvement in the rate of growth exhibited by consumer non-durables (which includes food products, beverages, apparel, toiletries etc) ever since the middle of fiscal 2001-02. In contrast, durable consumer goods (cars, motorcycles, TV sets, refrigerators and the like) after several years of blistering growth went into some kind of hibernation during 2002-03, registering an output decline of 6.1 per cent.
But non-durables, which are five times more important in terms of consumer expenditure, more than made up for this, growing by 12 per cent for the year. In the first two months of 2003-04, growth in non-durables has continued to be strong at 9 and 14 per cent respectively. Further, in May 2003, durables also returned to positive territory registering growth of 7 per cent.
It is difficult to reconcile such a strong and steady increase in the output of non-durable consumer goods with a significant contraction in incomes, as should have happened if indeed grain output had declined by 20 per cent, fallout of the great drought of 2002. We have always been sceptical of these numbers and the evidence of consumer goods production bears this scepticism out. It is worth recalling that many in July 2002 had felt that motorcycle sales, that living symbol of rural demand, would stall. But in fact it went up 28 per cent in 2002-03, while non-vehicular consumer durables slumped. It might also bear mentioning that the hibernation in durables last fiscal began many months before the monsoon was due; it has also ended several months before this most excellent monsoon was manifest.
It is thus best to do the obvious:
De-couple this obsessive and anachronistic linkage between the monsoon and the level of economic activity. Certainly, there is a bearing, but it has been much too overworked, mostly in the service of sectional agendas.
The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)