FE Editorial: Core question

Mon, Nov 2 02:01 AM

If any evidence was ever needed to substantiate the claim that we are still at a very nascent stage of recovery, one needn't go any further than examining the latest core sector data. The core sector—cement, coal, steel, crude petroleum, petroleum products and electricity—registered a growth of just 4% in September compared with 7.8% in August. Since the core sector consists of roughly one-fourth of the weightage in the index of industrial production, one can now expect the IIP for September (due to be released in November) to miss hitting the double-digit mark. This is bad news for official government forecasts of industrial output and GDP growth for this financial year. In order to meet the government's targets, IIP needs to grow in double digits for the rest of the year. The sharp dip in September's core sector data clearly shows that this isn't going to be a simple secularly rising recovery process—there will be stops and starts.

Interestingly, the very sectors that led the growth in August—coal and cement—are the ones that have shown the sharpest declines in growth rate. Cement is a particularly indicative sector of economic recovery as the demand for cement is highly correlated with the pace of construction activity. Quite clearly, while construction may have recovered from the lows of the crisis, there is still some way to go before its bounce back is sustainable. Taken together, the performance of the core sector is also an indicator of the growth in infrastructure more generally. Much of the focus of the government's fiscal stimulus packages was on infrastructure. It should, therefore, be a matter of concern for the government that activity in this sector hasn't picked up quickly enough, or fast enough. There are obviously time lags between sanctioning a project and the project reaching fruition, but the government might want to think about why the process is so slow in India. In other countries, notably China, fiscal stimulus has already boosted infrastructure. The relatively dull scenario in the core sector also makes one wonder whether RBI has made the correct call by weighing in on the side of inflation rather than growth so early in the recovery cycle. Sure, there is better recovery in consumer durables but that's only taking a partial view of the entire spectrum of industry. Much as though RBI doesn't believe this at all, there still remains a strong case for relaxing monetary policy for the next few months before perhaps taking a call on tightening late in 2010.

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