Industrial production numbers released last week were exceptionally poor. Industrial activity, as measured by the monthly Index of Industrial Production (IIP) contracted by 3.2 per cent on a year on year (y-o-y) basis in November 2015. IIP had last shown a decline in October 2014, of 2.7 per cent. At a time when India's industry is struggling to get back on its feet, any negative news can quickly feed into a plunging confidence about the state of the economy.
But how far are fears about potential loss of momentum in industrial growth justified?
Based only on this reading, they would be unwarranted. For one, there are one-time factors that have held back growth in November, like a drop in working days on account of the festive season, which fell in November in 2015 compared with October in 2014, as well as a loss of working days in the flood affected areas of Tamil Nadu.
Second, the sharp fall in IIP is explained by an over 24 per cent contraction in the capital goods sector. Given the characteristic lumpiness in the segment, and the fact that over the past 4 months, it had shown double-digit growth, the contraction in capital goods sector cannot be taken as a sure shot sign of a downturn. There was a base effect in play when capital goods production was hitting high growth rates in the past months, and similarly a wearing off of a favourable base has contributed to the contraction as well. However, that provides only part explanation. The underlying trend would make itself clearer in the months to come.
Third, a look at the average growth rate for 2015-16 so far shows a far more robust economic climate than that during the corresponding period of the previous year. IIP has grown at an average rate of 3.9 per cent in April-November 2015, compared with 2.5 per cent during the same time in 2014. This is not to say that the growth is satisfactory - far from it - just that it is better than in last year. And hence, it may be too soon to write off improvements in IIP yet.
