Industrial output data

The slowdown in industrial production to a 16-month low in September raises some questions about the sustainability of economic recovery, but more about the quality of the data and the propriety of an index that still includes tape-recorders and typewriters.

It is still too early to doubt the growth forecast of 8.5% this fiscal, especially given the potential for high farm growth this year.

Industrial growth slipped to 4.4%, largely due to a 4.2% drop in capital goods production, after recording a high double-digit growth till July this year. However, to conclude that the Reserve Bank of India’s (RBI) monetary tightening led to a decline in capital goods production would be hasty and wrong. A possible explanation is that the IIP captures only dispatches from factories.

The disproportionate weightage of some items like power turbines means that delayed dispatch of some key capital goods can create a drop in the capital goods index. The other segment that has shown high volatility at low levels of growth is consumer non-durables. It grew by 2.5% in September, compared with 3.9% in the same month last year.

This is surprising, as a rise in income levels should, normally, spur demand for consumer non-durables . There is no way of knowing. The RBI had earlier raised concerns over the quality of IIP data.

Now, the government has also admitted that the numbers need to be examined carefully. It should act swiftly, also to avoid more panic in the stock markets. The industrial slowdown, coupled with the global turbulence, saw the Sensex shed 432.20 points on Friday, with the biggest selloff by overseas investors since May 25 this year.

The government should also notify rules under the collection of Statistics Act to ensure prompt and accurate submission of data by various agencies.

Manufacturing, mining and electricity showed lower growth in September on an annual and sequential basis. Industrial production saw extraordinary growth rates since December 2009, but moderated in May this year. After a spike in July, it plunged to a 15-month low of 5.6% in August (revised upwards to 6.9%) and to 4.4% in September, compared to the same month last year.