A revival in industrial production is a healthy sign for the Indian economy, as it had turned negative in the recent past. With a question on agricultural output due to a late monsoon, it falls upon industry and services to contribute to the economy’s growth in 2009-10.
What:
- The index of industrial production for May 2009 has increased by 2.7%, doubling from its growth in April 2009.
- The manufacturing index, a keenly watched sub-indicator, grew by 2.5%.
Why:
- The data shows that the output of eight industries declined while that of nine grew. But what made a difference was the higher weightage of industries, whose output grew.
- Key industries that contributed to growth were chemicals, basic metals, mineral products textile, wood, rubber and plastic products.
- Among those which declined are consumer products like beverages & tobacco, food products, and industrial products like metal products & parts, cotton textiles and paper.
- Basic goods and intermediate goods are growing, indicating production reviving at the lower end of the industrial pyramid. But demand for fast moving consumer goods and staples seem to be under pressure. Consumer durable demand remains steady though (motorcycles are included here, partially explaining growth in this segment).
- Capital goods production has declined, a worrying sign. Also explains why the government was keen on incentivising investment in the Budget.
How:
- The improvement in the manufacturing index has been a keenly awaited event. It indicates that production growth in Indian industry may be recovering.
- It is also an indication of confidence returning in producers, that what they produce will be sold. In the past six months, several have been shuttering factories to cut output.
- Growth is reviving, but in certain pockets. An uptrend is visible at the intermediate products level, which is percolating to the basic products level.
- What is needed is for all round growth to be achieved, with better growth in capital goods production. Higher capital goods output percolates to demand for many industrial commodities.
- Also, in the context of high food prices, a slowdown in food products is a concern. Rising inflation may be forcing people to limit their consumption, affecting production volumes.
Perspective:
The Index of Industrial Production figures for May 2009 has been released today. It is a figure that measures how much output was generated in a month. It is made up of three sub-indices, mining, manufacturing and electricity. If electricity is showing growth too, it is a positive leading indicator, as it indicates that factories are running their machines and consuming electricity. In May 2009, electricity production was up 3.3%.
The data for June 2009 will be available on August 12, 2009. The current release can be viewed here.