Factory output has pulled back from negative territory in November, growing 5.9%, the fastest pace in five months. This is a sharp turnaround from the 4.74% contraction in the index of industrial production witnessed in October. At worst, the latest data would indicate October was a blip, not a sustained decline. At best, November could be a pointer that industrial activity has shrugged off months of sluggishness induced by a cycle of ever increasing interest rates. The case for the pessimist is stronger. Over April-November, industrial growth has slowed to a crawl; it is down to 3.8% from a healthy 8.4% in the same period of 2010. Reserve Bank Governor Duvvuri Subbarao must draw considerable satisfaction that a series of 13 hikes since March 2010, which saw interest rates climb by 3.75 percentage points, has had its desired effect on deflating demand in the economy. Core inflation - minus volatile food and energy prices - will dictate when the central bank begins to unwind its monetary stance. Wholesale inflation in November was 9.11%, marking a year when it has remained stuck above 9%. Policy makers, however, expect the December data to show significant improvement.
Factories, mines and power plants will need more than interest rate cuts to regain their growth momentum of a year ago. Companies will have to be prodded to set up fresh capacity. Production of equipment that goes into setting up new plants that churn out the stuff we eventually buy shrank 25.5% in October 2011, a precipitous fall from 21.1% growth in the same month a year earlier. In November, the picture was not as grim, yet the output of capital goods fell 4.6%. Consumers, likewise, cut hire-purchase of durables like cars that pulled down the rate of growth from 14.2% a year ago to a 0.3% decline in October. Even when interest rates don't pinch much, Indians seemed to have stopped shopping: consumer non-durables like soaps contracted by 1.3% in October. November brought some respite on both counts. Consumer durables clocked growth of 11.2% from a year ago and consumer non-durables 14.8%.
Finance minister Pranab Mukherjee and Mr Subbarao appear to be in agreement that policy will now need to gear up to give industrial growth a push. While Mr Mukherjee could be expected to announce measures to nurse back into health an anaemic capital goods segment, Mr Subbarao will concern himself with lowering the cost of money in India. Headline inflation and the pace of rupee devaluation - capital goods are heavily driven by imports - will create the setting for interventions by the government and the central bank.