Recently released figures suggest that as per the provisional index of industrial production, industrial growth during 2002-03 stood at 5.8 per cent, as compared with 2.7 per cent in 2001-02 (Chart 1). This has been interpreted as suggestive of a return to buoyancy after a two year period of sluggishness in the industrial sector. However, the case for such optimism is indeed limited. To start with, the 5.8 per cent figure reflects a performance lower than recorded during 6 out of the last 10 years and is way below the 9.1 and 13 per cent rates of growth recorded in 1994-95 and 1995-96 respectively. Secondly, coming after the poor performance of 2001-02, this figure does not help rectify the fact that the trend rate of growth since the economic reform began in 1991-92 has been lower than that recorded during the 1980s. Ignoring the immediate post-adjustment years 1991/92 and 1992/93 when industrial growth slumped because of import compression and fiscal adjustment, the trend rate of growth during the 10-year period 1993/4-2002/3 was at 6.3 per cent short of the 6.7 per cent per annum trend rate of growth recorded during the years 1981/82-1990/91.
Chart 1 >>

It is indeed true that the IIP is only a lead indicator, that in the past has been known not to reliably capture actual trends in the registered industrial sector as revealed by output and value added figures from the Annual Survey of Industries (ASI), that become available only after a two year gap. An index capturing movement in production as suggested by inter-temporal production relatives, the reliability of the IIP can be adversely affected by its inadequate coverage and persistent problems of poor response from reporting units. However, during the 1990s the IIP growth figures as revealed by the GDP at factor cost in registered manufacturing, which are available separately for 1990-91 to 1994-95 with 1980-81 as base and for 1994-95 to 1999-2000 with 1993-94 as base, point to a similar trend as the IIP over time, though the figures using base 1993-94 yield much higher growth rates than both the older National Accounts Series and the IIP.

Overall it appears that during the 1990s the IIP does provide a reasonable guide to industrial trends despite its many shortcomings. Using the IIP therefore, we could argue that after falling sharply in 1991-92 as a result of the import compression and stabilisation resorted to by the government in response to the balance of payments crisis, industrial growth recovered quite well, rising to 6.0 per cent in 1993-94, 9.1 per cent in 1994-95 and 13 per cent in 1995-96. After that, however, the industrial sector has witnessed a downturn, with the rate of growth falling to 6.1 and 6.7 per cent in 1996-97 and 1997-98 and slipping further to 4.1 per cent in 1998-99. There were signs of a recovery in 1999-2000 with the rate rising to 6.7 per cent, but subsequently the pace of growth has slackened substantially, standing at just 5 per cent during 2000-01 and 2.7 per cent in 2001-02.

In sum, the trend growth rate in the IIP since the reform, is not just lower than what was seen during the 1980s, but conceals two periods of sharply divergent trends: a period of recovery and growth during the first half of the 1990s, followed by a period of slump during the second half of the 1990s, which has recently been aggravated, after a brief promise of a possible return to growth in 1999-00. With the overall trend of the second half of the 1990s persisting into the first half of the first decade of the new century, we can safely conclude the growth has indeed turned sluggish despite individual years of near-average performance.

These tendencies are revealed more clearly in Charts 2 and 3, which provide the month-on-month annualised rates of growth in the general index and the IIP for manufacturing during the period starting after the recovery in 1994-95. They suggest (i) that there have been three troughs since then: one centred around January 1997, the second around October 1998 and the third around May 2001; (ii) that the recovery after each of these troughs has not been strong enough to restore the high rates of growth recorded during the mid-1990s; (iii) that the peak in each of these cycles has been lower than the one preceding it; and (iv) the trends in the general index have been driven by the trends in the manufacturing sector as reflected by the manufacturing component of the IIP. These features emerge from Chart 4 as well, which takes a closer look at the years of the down turn, by examining quarterly growth trends (relative to the corresponding quarter of the previous year) in the general index as well as manufacturing IIP for the period stretching between the second quarter of 1995 and the first quarter of 2003. The picture here is more complex. From a peak of close to 15 per cent in manufacturing and just below 14 per cent in the case of the general index, growth slumped to a low of less than 3 per cent in the first quarter of 1997. This was followed by a recovery that lasted three quarters, which took manufacturing growth to 9 per cent. But the recovery proved short-lived and Indian industry once again experienced a slump till the third quarter of 1998.In the next four quarters there was yet another phase of recovery, with manufacturing growth touching close to 10 per cent in the third quarter of 1999. But the downturn returned and proved to be much longer and sharper, bringing the growth rate down to 2.5 per cent in the third quarter of 2001.Though there has been a recovery since then, the quarter-on-quarter rate of growth seems to have peaked at around 6 per cent.
Chart 2 >> Chart 3 >> Chart 4>>

Charts 5-10 examine these annual growth trends separately for the major use-based industrial categories. It is clear that basic goods and intermediate goods display more or less the same trends as the overall manufacturing index, though the degree of sluggishness after the mid-1990s is greater in the case of intermediate goods. The difference really arises in the capital and consumption goods categories. The capital goods sector (Chart 6) appears to have a rather volatile record of growth during the 1990s with quite a few years of creditable growth (1994/95, 1996/97 and 1998/99), a period of extremely poor performance during 1999-00 and 2000-01 when growth rates collapsed and a stronger recovery in 2002-03 than in most other sectors. One possible way in which this could be interpreted is that investment in other sectors responds with a lag to any production downturn, resulting in longer-periods of buoyancy in the capital goods sector and much sharper cuts in production when the downturn sets in. This implies a substantial degree of irrationality that leads to larger unutilised capacity in the manufacturing sector. The recovery in demand for and production of capital goods in 2002-03 could also be seen as partly reflective of such irrationality.
Chart 5 >> Chart 6>>

The other sector which has gone against the grain in terms of annual rates of growth is consumption goods. In keeping with overall trends, the rate of growth of consumption goods production did fall sharply after the mini-boom during 1994-96 (Chart 8). But since 1999-00 that sector has registered rather consistent creditable (even if not high) rates of growth. What is more, while both consumer durables and non-durables played a major role in the mid-1990s boom in consumption goods production as well as the subsequent collapse in growth, post-1999 performance has been driven in most years by consumer durables production. However, the above-average performance of the sector in 2002-03 occurred despite a sharp fall in consumer durables production, because of a remarkable 12.3 per cent rate of growth of non-durable consumer goods production. While the good performance of consumer durables in most years is in part the result of the consumer credit boom that financial liberalisation has unleashed, the performance of consumer non-durables in the most recent year still remains a puzzle.
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