Industrial production slips again

After a brief revival in August, India's industrial production fell yet again in September, fueling worries that higher interest rates and a stronger currency was hurting demand in Asia's fourth largest economy. This may spur fresh calls for a reduction in interest rates and steps to check the relentless rise in the rupee. The Index of Industrial Production (IIP) grew by just 6.4% in September as against 12% in the same month last year, the Commerce & Industry Minister said. This was the lowest growth rate in IIP in the past 11 months and came well below consensus estimates of around 9%.

IIP had expanded by 10.7% in August after an upwardly revised growth rate of 7.5% in July which had led to concerns that a high base effect, rising borrowing costs and a strengthening rupee was taking its toll on the Indian economy. Growth in the manufacturing sector declined in September to 6.6% from 12.7% in the corresponding month a year earlier while that in electricity was also lower at 4.5% versus 11.3% in September 2006. Mining output expansion improved to 6% as against 4.3% in the year-ago period. On a cumulative basis (April-September 2007-08), the industrial output was at 9.2% versus 11.1% in the first six months of the last fiscal year.

As many as 15 of the 17 industry groups showed a positive growth during September. 'Wood & Wood Products’ clocked the highest growth of 72.5%, followed by a 27.1% growth rate in ‘Other Manufacturing Industries’ and 14% in ‘Basic Metal & Alloy Industries’. On the other hand, ‘Transport Equipment & Parts’ showed a negative growth of 1.6% followed by 1.5% in ‘Food Products’. Sectoral growth rate in Basic Goods, Intermediate Goods and Capital Goods was at 6.7%, 9.3% and 18.6%, respectively. Consumer Durable and Consumer Non-durable recorded growth of (-) 7.6% and 2.2%, respectively, with the overall growth in Consumer Goods being (-) 0.6%.

The slowdown was mainly due to weaker performance of the manufacturing sector, especially the consumer durable segment as the RBI continued to tighten its monetary policy to counter the flood of dollar inflows and currency appreciation. Industry chambers like CII and ASSOCHAM have been clamouring for reduction in rates to revive consumer demand for new homes, cars, bikes and electronics. Top bankers like K.V. Kamath have also sought rate cuts as credit offtake has decelerated to around 23-24% from over 30% last year.

But, given the spike in money supply growth and the dollar deluge, the RBI is unlikely to oblige. But, one thing's sure that rates have peaked out and they can only fall from here. Also, the busy season actually starts from October due to a slew of key festivals and harvesting of kharif crop. As a result one would have to wait for the IIP data for the next couple of months to arrive at any firm conclusion as to how deep and serious is the industrial slowdown.