Will the number of Index of Industrial Production (IIP) for June, 2009 mark an early sign of recovery? Well, it has signaled hopes of an economic recovery strengthened by the factory output surging to a 16-month high of 7.8 per cent growth in June, beating forecasts by a wide margin and reversing the bleak trends that had set in since the deep shadow of world economic slowdown had impacted Indian economy. Everybody on the payroll of the Government has jumped on to the opportunity of calling it a reversal of downhill journey. Even others in the fourth Estate have also joined the bandwagon, which is partly because of all three components of the Index registered impressive growth rates with Mining growing up by 15.4 per cent; Electricity by 8 per cent and Manufacturing by 7.3 per cent. To add icing, from the use-based perspective, the driver of this performance was Consumer Durables, which grew by 15.5 per cent, which continued its own streak for almost three months in running.
Now that the economy is perceived to have taken an about-turn with industrial production picking up, the moot point is whether the buoyancy reflected in IIP informs other sectors of Indian economy, particularly exports?
Impact on Indian Economy
First, its impact on Indian economy. Only if you read the June 2009 figure for Manufacturing with those of months of April and May 2009, you can reach a more sober conclusion. The industrial output transited from negative area to positive by a meager 1.2% in April, following by 2.2% in May, which were in fact scaled down from the earlier forecast of 2.7%. However, the June 2009 figures "no longer looks like flash in the pan" to FICCI President Harsh Pati Singhania. Several analysts also have attributed the June numbers to the impact of stimulus measures announced and implemented by the Government and the Reserve Bank of India. Rating agency Crisils Principal Economists, D.K. Joshi said, "This is more than expected. It is mainly driven by the fiscal and monetary stimulus. Interest rate softening has started showing positive impact on the industry." Finance Secretary, Ashok Chawla said, "High growth in Indias capital goods sector is a sign of turn-around in the economy and the positive trend in industrial output will continue."
However, nobody seems to apply ones mind to the fact that the so-called financial stimuli I, II or even III were sanctioned sometime in December/January/February and were operationalised immediately. It would be recalled that the loss of demand, both external and internal, had led to decline in production of products and machinery, which were needed to be replenished at some point of time, after the inventories had touched rock bottoms. That would have provided some impetus in demand which resulted in production picking up. But then, there is a steady, but surely slow growth. From a mere 1.2% increase in production in April to a downsized target of 2.3% in May, the production leapfrogged to 7.8% in June, with apparently no major new factor coming in.
A more acceptable assessment did come in from Dun & Bradstreet India Head (Economic Analysis) Yashika Singh, who said the June growth data could be an aberration, but the economy is certainly stabilising. Singh added, "Therefore, it may be premature to state that this is a sustained industrial bounce-back, and perhaps cautious optimism needs to be maintained when reading into these numbers. Nonetheless, growth in industrial production in recent months has shown signs of stability returning into the economy."
FICCI Survey Confirms Slowdown Impact on 94% SMEs
The fiscal stimuli announced by the Government of India with so much fanfare had had little blaming effect on Small and Medium Enterprises (SMEs) as 94% of them, mostly catering to the export markets, are languishing in the remains of the slowdown, says a survey conducted by Federation of Indian Chamber of Commerce and Industry (FICCI). According to the survey, most of the respondents reported that their overall business has been affected "severely or moderately." The participating companies indicated that they have lost most of their major markets primarily in Europe and the US and are struggling to find new markets for their products. Perhaps, the most revealing statement in the survey is that almost three in every four companies said that they were not aware of the stimulus measured announced by the Government for the SME sector. "Out of those, who were aware of the incentives, a majority of them indicated that such measures have not really enabled them to regain business momentum."