Economic opinion is currently almost evenly divided between the optimists who believe that the economy has put the worst behind it and the pessimists who insist that there is far more bad news in store.
The latest estimates for industrial output in February queer the pitch for the pessimists. Industrial output in the month was 1.2% below what it was a year ago, in line with what most economists were expecting. More importantly, it was around 3% lower than its January level, an indication that industrial activity continues to contract. The actual Index of Industrial Production in February was almost at the same level as it was in May 2008; industrial output stagnated through most of the last fiscal year despite occasional good months.
Illustration: Jayachandran / Mint
The record at the level of individual industries has been mixed, with eight out of the 17 major industry groups reporting higher output than a year ago. The overall index was weighed down by very large production declines in some industries such as food products that have a hefty weight in the index.
In terms of the so-called user-based classification, capital goods grew at double-digit rates while consumer durables recorded a more modest 5.7% growth. But consumer non-durables, basic goods and intermediate goods saw output drop compared with a year ago.
Demand for industrial output in February should have responded better to the interest rate cuts by the Reserve Bank of India after October and the two fiscal stimulus packages in December and January (at least the December stimulus).
There has been anecdotal evidence that demand for some consumer goods is looking up. Leading indicators such as sales of commercial vehicles and cement despatches give room for optimism. Indicators such as bank credit and non-oil imports, however, take away some of the cheer.
Our own guess is that the precipitous decline in demand and asset prices is a thing of the past, though we are not quite sure that the economy is on the verge of a V-shaped rebound. A lot will now depend on two sets of factors, domestic and global. Domestically, the government has spent its entire fiscal firepower and it remains to be seen what the next government does. On the global front, while US Federal Reserve chairman Ben Bernanke says he sees green shoots in the world economy, the damage to corporate and household balance sheets is too severe to hope for a quick recovery in 2009.
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