The January jump in IIP is a mere blip,it should not distract from the economic task at hand
The sudden one-month spurt in industrial output reflected in the 6.8 per cent jump in the index for industrial production in January should not lead to conclusions that green shoots of robust growth have firmly set in. Far from that. The eight core sector industries that make up over a third of the total IIP grew a meagre 0.5 per cent in January. Further,the surge is largely on account of a huge 42.1 per cent increase in consumer non-durables that has resulted in an 8.5 per cent growth in manufacturing. Also,the cumulative April-January IIP growth is just 4 per cent compared with 8.3 per cent during the corresponding period last financial year. Of course,policymakers do not look at just one data point. The governments own provisional data for the full year,compiled by the Reserve Bank of India,suggests that industrial output for 2011-12 will show a marginal 1.32 per cent growth over the previous year. Besides the numbers which clearly suggest that monetary tightening,policy paralysis at home and adverse global environment have killed private sectors appetite for investment,the RBI also relies heavily on expectations.
Clearly,data collection and collation leave much to be desired. Sharp variation of data pertaining to IIP,exports and even inflation do not give policymakers a very good grip of the situation on the ground. But the RBI can pick the straws in the wind since it is expectation or outlook on inflation and growth that matters the most. And it is always better to be ahead of the curve than wait for events to happen and react.
Januarys wholesale price index suggests that inflation for manufactured products dropped for the second month in a row and seems to be on a downward path. This gives the monetary authority some headroom to act bold. Crucial,however,will be inflation data that will be released on Thursday,a day before the RBI meets for a mid-quarter review. If indeed,manufactured inflation continues to slow down,Governor D. Subbarao will have data to back his rate cut move.