GDP outlook goes for a toss as industrial growth sinks to 2-year low.
It was a foregone conclusion the Indian economy would not clock nine per cent growth this year as expected at the time of preparing the Budget. But, now, even eight per cent looks extremely unlikely.
The Reserve Bank of India’s (RBI’s) tight monetary stance, coupled with problems in the coal sector and uncertain global recovery, led to industrial growth sinking in September. Growth hit a two-year low of 1.9 per cent, against 6.1 per cent a year ago.
The central bank’s repeated interventions to tame inflation are also yet to yield results. Food inflation remained high at 11.81 per cent despite some moderation for the week ended October 29.(Click here for table & graph)
In fact, industrial growth for August was also revised down to 3.59 per cent from the 4.1 per cent estimated initially, clearly showing signs of a slowdown. These figures are generally revised upwards after the provisional numbers.
The industrial growth figures for October may come as a shock due to a high base effect of 11.3 per cent last year, analysts say, but the festival demand in the month may offset some of the negative impact.
Also Read
The dismal industrial growth data came on top of export growth witnessing a sharp decline to 10.8 per cent at $19.9 billion in October. The rate of growth in exports has been plummeting continuously since July, when it hit 81.79 per cent. In imports, the monthly growth rates have been highly volatile. The trade deficit has widened to $93 billion in the first seven months of this financial year and could even breach $150 billion.
However, policymakers do not rule out the economy clocking eight per cent growth this year, though their tone has turned relatively pessimistic. India’s economy could grow between 7.6 and eight per cent in the year to March 2012, news agency Reuters quoted Planning Commission deputy chairman Montek Singh Ahluwalia as saying.
“I won’t comment on the 2011-2012 full GDP numbers, but one thing is sure, that all the earlier talk of 9-10 per cent GDP growth is unfounded, though the long-term growth prospects of the Indian economy remain fully intact,” chief statistician T C A Anant said.
However, a Deloitte, Haskins & Sells director pegged India’s economic growth for the year at 7.5 per cent against 8.5 per cent last year. India’s economy grew by a six-quarter low of 7.7 per cent in the first three months of this financial year. Signs of economic growth do not look promising for the second quarter either. Industrial production grew at a snail’s pace of sub-five per cent for the third month in a row in September.
For the second quarter, industrial growth stood at just 3.07 per cent. Industry constitutes 18.50 per cent of India’s GDP.
“We now see a significant downside risk to our FY12 average IIP growth forecast of 6.7 per cent,” said Shubhada Rao, chief economist, YES Bank.
Industrial growth nosedived in September as mining output contracted 5.6 per cent and manufacturing production grew just 2.1 per cent.
Mining output declined for three months out of six this fiscal, dragged down by coal output, which registered a negative growth of 17 per cent in September.
"Coal production contracted because of late withdrawal of the monsoon and strikes in Coal India," Rao said.
Analysts also attributed the fall in coal production to problems related to environmental issues and a disruption in Singareni Collieries Company because of trouble in the Telangana region.
“An improved policy framework in the area of mining is required to incentivise large scientific mining in the country,” Ficci secretary general Rajiv Kumar said.
However, the biggest dent to industrial growth came from manufacturing, which constitutes over 75 per cent of the Index of Industrial Production, on the basis of which industrial growth is measured.
Within this sector, capital goods production declined to 6.8 per cent, while consumer non-durables contracted 1.3 per cent. As consumer non-durables are generally the last to be affected by a slowdown, the story warns of things to come, analysts say.
"The RBI should not only pause but begin to reverse its interest rate hikes," CII director general Chandrajit Banerjee said.