One cheer and 5 messages in the March IIP revival
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Economy May 10, 2013

March IIP boosts green shoots theory, but it’s not a recovery

By Sourav Majumdar

The March Index of Industrial Production (IIP) print, which came in at 2.5 percent, will provide some relief to a beleaguered government and the Reserve Bank of India, coming as it does on the back of sluggish industrial activity and sputtering growth. The February figure has been revised slightly to 0.5 percent, from 0.6 percent earlier.

The March figure is powered by a healthy 6.9 percent growth in capital goods production and a 3.2 percent growth in manufacturing, which constitutes over two-thirds of industrial output.

March numbers. Reuters

March numbers. Reuters

The March IIP figure comes as a serious boost for the central bank as well, which has been seeking to support growth with a series of rate cuts since January this year. Bankers Firstpost spoke to earlier had said that there are some signs of green shoots in the economy, with enquiries beginning to come in from some sections of corporate India. Finance Minister Palaniappan Chidambaram's accent on trying to unclog stalled projects has also been seen as a major sign by corporate and bankers that a serious effort is being made to give growth and manufacturing a big push. The chairman of the Prime Minister's Economic Advisory Council C Rangarajan has also said that faster project clearances and effective utilization of capital are the two areas which will be critical to sustain the momentum, going forward.

By all accounts, the March figure is some cause for relief. But a close look at the risks which remain will suggest that there's hardly any scope for cheer just yet. For a government dogged by scandal and charges of corruption, economic decision-making and pushing through the reform agenda will once again turn extremely difficult. This is already being evidenced by the political standoff at the Centre over the twin controversies surrounding two key UPA ministers Ashwani Kumar and Pawan Kumar Bansal and calls for Prime MinisterManmohan Singh's resignation. Against this background, policymaking is set to become the first casualty.

Consider also the Reserve Bank of India's assessment of the risks the Indian economy faces. The ballooning current account deficit (CAD) continues to pose the greatest risk to the economy and rules well above what RBI calls the sustainable level of 2.5 percent. Revival of growth, the central bank underscores in its monetary policy statement for 2013-14, cannot take place without a revival in investment.

The clearest statement from the RBI comes when it says without mincing words: "... the effectiveness of monetary policy in bringing down inflation pressures and anchoring inflation expectations could be undermined by supply constraints in the economy, particularly in the food and infrastructure sectors. Without policy efforts to unlock the tightening supply constraints and bring enduring improvements in productivity and competitiveness, growth could weaken even further and inflationary strains could re-emerge." Ample evidence that despite the rate cuts and the pronouncements from the government on fiscal consolidation and reform, the central bank is clearly hawkish on the road ahead.

Importantly, the latest HSBC Purchasing Managers' Index print which came in for April showed the reading, at 51, had fallen to its lowest since November 2011, but export orders had risen and input and output price inflation had eased. This, together with the moderation in commodity prices and crude, has led to optimism in some circles. However, weighed against the risks and the political reality, there's little at this point for Corporate India to cheer.

Green shoots need to be nurtured. But will a government fighting a scandal a day be able to do that? This is a question everyone, including the RBI, will be asking. The answer, unfortunately, may be in the negative.

by Sourav Majumdar

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