Industry is growing, but not speeding, Financial Express 28th January 2010

The economic indicators announced in the last month or so have been very encouraging. The IIP growth number for the first eight months of the year was 7.6% with growth in November being 11.7%. In fact, in the last six months, the month-on-month rate has exceeded 7% and crossed the double-digit mark thrice. Exports have started showing an about-turn, though just for one month. But, given that the world economy is improving, there is reason to believe that all may be well. However, the industrial picture begs certain questions that need to be answered. The first is that the closest indicator of industrial growth, bank credit, has not exhibited a parallel picture. Growth in bank credit is sluggish at 8.8% for the first nine months of the year as against 12.5% last year. Either industry does not demand the funds or banks are not lending easily—either way the result is that growth is low. This quick indicator of industrial activity does not quite gel with the numbers witnessed in the real sector. The second is that growth in bank deposits, which still constitute around 45-50% of domestic household savings, is down at 9.8% as against 11.7% last year. This is a proxy indicator for investment taking place as savings get translated into investment. As this number is low, there is some concern here, even though in terms of equity raised in the market, the picture is more sanguine at Rs 87,146 crore in the first nine months of the year as against Rs 30,517 crore last year. The third concern here on the industrial front is that the corporate performance is not what it should be. Detailed information on corporate performance for the third quarter, and hence the first nine months, would be available only after February. But, if one looks at the first six months’ performance of industry and the corporate performance, there is a disconnect. Industrial growth has been moderately high at 6.3%; but according to RBI’s latest study on financial performance of companies for the first half of FY10, sales for a sample of 1,752 manufacturing companies had declined by -1.6% while net profits were up by 9.6%. Curiously, profits increased mainly due to the sharp cuts in raw material costs by 9.3%. Stocks, too, had registered a sharp decline during this period. Hence, it is difficult to reconcile declining sales and stocks with growing production. A similar picture is witnessed at.the disaggregated industry level, where sales growth in industries such as chemicals, paper, rubber and machinery was lower than the equivalent IIP growth numbers. This is really a conundrum for interpretation because the IIP numbers that show production growth are not getting reflected in the sales performance. Another related factor that provides important support to industrial growth is the electricity sector. This number has been relatively low at 6.1% in the first eight months and at 3.3% as of November. Typically, the power sector output should be rising dynamically with that in manufacturing. The fourth anomaly in the industrial performance can be viewed from the sharp decline in non-oil imports. This is again significant because normally any growth recovery in the economy must get reflected in higher imports. Normally one would expect imports of raw materials and capital goods to increase to support industrial growth. This is not yet visible and the growth rate as late as November has been negative. The consolation here is that the decline in imports has been low at 6% as against double-digit rates during the year. The fifth indicator of state of industry is the movement in prices. Growth of manufactured segment prices is still low at around 5%, which comes down further to around less than half per cent if food products are excluded. Normally when industrial growth picks up, prices also increase for two reasons. The first is the demand factor that pulls up prices. The other is high manufactured goods inflation is a precondition for industrial growth to take place. The absence of such price increases is again not supportive of the growth hypothesis. The last anomaly that cannot be fully reconciled is tax collections. For the first eight months of the year, corporate tax collections increased by 6.6%. However, customs & excise collections were down at 31.2% and 20%, respectively. Quite clearly, the tax payments have not been coming in at the same pace of production. While lower tax rates could be part of the explanation, even in the last two months the drop in excise collections is significant—this was the time when rates were relaxed by the government in 2008. Given these anomalies in related scenarios, it may be prudent to wait and watch before being convinced that industry is really back on its feet.