News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

This article was first published 9 years ago
Rediff.com  » Business » Why economic uptick cannot be taken for granted

Why economic uptick cannot be taken for granted

By BS Bureau
September 15, 2014 09:46 IST
Get Rediff News in your Inbox:

The real question is whether the recovery is strong enough to provide a boost to the several industrial and service sectors that are still floundering.

IndiaThe Index of Industrial Production for July was published last week.

After some relief being provided by the previous month’s IIP numbers, these undoubtedly came as a disappointment.

Production grew by a mere 0.5 per cent year-on-year, a significant comedown from the 3.5 per cent clocked in June.

In particular, the manufacturing sector, which comprises almost 80 per cent of the index, showed a decline of one per cent over a year ago, which clearly renews doubts about green shoots and a turn in the business cycle.

The contribution of the June performance keeps the April-July growth rate at slightly above three per cent, which is a distinct improvement over the decline recorded in the corresponding period of last year.

However, if the July pattern persists over the coming months, gross domestic product growth forecasts for 2014-15, which have been generally revised upwards over the past few weeks, may reverse direction.

The real story, though, seems to be in the wide variation across individual industries.

A reassuring indication is the performance of some critical industries, which are usually concomitant with the business cycle.

Basic metals and non-metallic mineral products (primarily cement) showed growth of around 12 per cent year-on-year, suggesting that sectors like construction were showing signs of revival.

While the main automobile categories were sluggish, other transport equipment grew by over 17 per cent.

Moreover, sales data from the automobile industry support inference of a distinct recovery in performance.

In the

June data, these three industries had also shown similar steady growth, even as there was a wide variation in the performance of other sectors.

And so it was in July.

The big negative contributions came from radio, TV and communication equipment, which declined by over 58 per cent, and office and computing equipment, which declined by over 26 per cent.

Such large negative numbers, even if they come from relatively low-weighted industries, clearly have an impact on the aggregate.

From the perspective of the use-based classification, capital goods declined by almost four per cent in July, although the April-July performance was a relatively healthy 8.5 per cent.

Consumer durables, on the other hand, dropped by over 20 per cent in July, which contributed to a 12 per cent decline during April-July.

Such wide variations across industries clearly do not signify a broad-based, let alone sustainable, recovery.

However, the steadiness in the performance of segments like metals, cement and transport equipment does reinforce the perception that there is an upswing in the business cycle.

Importantly, the macroeconomic situation is generally turning favourable -- moderating inflation, the sharp decline in oil prices, with fiscal and current account benefits and a firm currency -- which is conducive to nurturing and reinforcing the upswing.

The real question is whether the recovery is strong enough to provide a boost to the several industrial and service sectors that are still floundering.

This will be determined by how quickly and firmly the government is able to deal with several bottlenecks that have crippled growth over the past couple of years.

A major one is infrastructure, in the context of which the recent order declaring  coal licences as illegal is a setback.

A recovery may indeed be under way, but it cannot be taken for granted.

Get Rediff News in your Inbox:
BS Bureau in New Delhi
Source: source
 

Moneywiz Live!