Millennium Post

Premature celebrations over economy

This week’s release of data regarding industrial production shows a mild growth of 2.6 per cent. But that has been hailed as a sign of a rebound in the industrial sector. Admittedly, this was an improvement of sorts from a situation when the industrial output was shrinking. It shrank by 1.8 per cent in June and by 2.8 per cent in May. But such is the level of desperation that even this green shoot of growth in industry is being viewed as enough of a cause for celebration as many commentators and media did.

The little growth in July could be more of technical nature in the sense that one segment, that is, capital goods sector should a sharp spike of over 15 per cent in July. But this is normal behaviour of the capital goods sector. It oscillates between extremes: it goes up sharply or goes down as much. This time, it has gone up and helped inflate the overall industrial growth number somewhat. In fact, an expert group looking into the IIP figures and the underlying construction of the index is examining this aspect of fluctuations in the figures for capital goods. Additionally, both manufacturing sector and electricity has shown similar recovery. Manufacturing has posted growth of three per cent and electricity five per cent. Electricity had been showing healthy growth trends until recently. Manufacturing on the other hand has been struggling for most of the time over last one year. But leaving that aspect aside, is the rise in the index of industrial production is clear pointer to a recovery in industry. As such, the growth is small. But even this could be taken as a turnaround only if we see this repeated in the next few months. We have seen such recoveries in March and in January this year when the IIP showed growth of 3.5 per cent and 2.5 per cent respectively. Before that in October last year, the index had spiked sharply by 8.4 per cent before sliding into low levels again.

Nevertheless this is good news. One can at least look forward to possibly positive growth numbers now on. There are some other grounds for being a little bit optimistic. That is from the export figures. At long last, exports increased by 13 per cent on last reckoning and the growth of the manufacturing sector might have fed into it. The depreciation of the rupee had improved the competitiveness of Indian products and some of Indian manufacturing items have become more acceptable. Among these are textiles. India had been facing stiff competition from China and Bangladesh in textile markets. Appreciation of Chinese yuan and steady trends in Bangladesh currency, when the rupee had been depreciating fast, helped Indian exports. Textiles industry sources no wonder were happy at the sudden turn of events.

Since the Indian exports have been observed to be closely linked to the cycles in global trade, it is reasonable to expect that the exports should maintain a healthy growth. The international trade turnover was increasing at long last and this upswing in global trends could be captured by Indian exports, helped by the lagged effects of rupee depreciation. Thus, this will be another booster to the industrial sector. Now that industry hopefully is showing signs of life, it is time that a few steps should be taken to help it chug along more vigorously. I capital goods sector buoyancy this time is really a result of rise in investment, then this could be further   egged on by cutting the interest rates. This is the instrument, which can encourage further investment.

Whether such a step could be taken by the Reserve bank given the instabilities in the foreign exchange market. This is the moot question. A cut in interest rate and more liquidity in the system could result in more speculative battering of the rupee, it is feared. This will be contrary to RBI latest policy move offering incentives to banks to attract NRI deposits by offering them higher returns.
It is important to remember that these short-term measures for curbing rupee volatility cannot really address any of the fundamental concerns, which are bogging down exchange rate. Only hot money could flow on considerations of short-term interest arbitrage. Long-term stable money would flow only when the economy is strong. That is when Indian industry is doing fine and corporates’ bottom lines are solidly in the black.

That is the kind of policy RBI and the government should follow now – a clear statement that industrial growth is a top priority. A cut in interest rate at this point of time should be that step. We should celebrate a rebound only when industrial growth rate runs towards double digit growth, as we had during the best period of growth recently. IPA
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