One cheer and 5 messages in the March IIP revival

By R Jagannathan

The 2.5 percent growth in the Index of Industrial Production (IIP) in March - a huge reversal from the negative -2.8 percent growth of March 2012 - shows that the economy is probably turning around. This is the first real green shoot that is noteworthy.

There are five interesting takeouts and implications of these new numbers released today .

Understated recovery: One, the 2.5 percent IIP growth is really an understated recovery, since the rise is on a much higher base of March 2012, when the IIP was at 187.6.

Sequential growth has been high: Two, the sequential growth in March over a weak February 2013 is actually as high as 9.26 percent. In February, the index was at 176 while in March it was 192.3. It is this leap that allowed the IIP to close 2.5 percent higher over March 2012’s high number of 187.6.

Turnaround just beginning: Three, thanks to the March 2013 high jump, the year’s overall IIP is now a positive 1 percent. Down from last year’s 2.9 percent, but positive nevertheless. The turnaround is beginning to take shape.

Turnaround led by capital goods: Four, the March turnaround has been led by capital goods, which grew 6.9 percent against a negative -6.3 percent average for the whole year (April 2012-March 2013).

March turnaround eluded consumer durables : Five, the turnaround in March has eluded consumer durables (-4.5 percent), but consumer non-durables (your everyday stuff like toothpaste, packaged food, staples, etc) has been a positive 6.5 percent. This is suggestive of consumer wariness about the future - as a result of which they are holding back on big ticket purchases such as cars and fridges and ACs, but normal consumption of everyday necessities is doing fine.

The net outlook has thus returned to even keel and there should be cause for cautious optimism.

Growth could lead to inflation: On the other hand, this growth could lead to inflation if pricing power has returned to manufacturing industry. But it won’t happen soon because of unused capacity and still sluggish demand.

CAD worrying: Another cause for worry is the current account deficit (CAD). If growth resumes, the rupee could come under pressure if imports rise and capital flows to finance the CAD become sluggish. There is thus no cause for too much cheer.

Since food inflation is still high, and election spending will drive prices up anyway, the expectation should be that both growth and inflation may return unless fiscal spending remains on a tight leash and the Reserve Bank of India eases interest rates only cautiously.

While P Chidambaram cannot let go on the fiscal front, RBI Governor D Subbarao was probably right to not ease too much on 3 May. He has to keep a hawk’s eye on prices as industry revives.

The March IIP is cause for one cheer, and two cautionary notes.