Industrial growth has been lagging for some time and November IIP data is no exception. The favourable base effect of the earlier month has been negated. The readings are in line with the general trend emanating from the industry. Of the components, capital goods continue to be volatile. At – 7.7%, the sector is suffering from supply side issues. High direct and credit cost coupled with thin margins are affecting growth and output. Mining continues to suffer and electricity sector numbers are below the levels achieved over earlier quarters. Consumer durables have also not performed well, especially as these numbers follow the festive season.
While November numbers show a significant contraction over strong October data, the overall trend is worrisome. Compared to a 7.2% growth rate in the last financial year, the quarterly numbers for the current fiscal are dismal. The reasons for the contraction are evident. Regulatory hurdles, tight credit constraints and inherent issues in manufacturing and mining have hastened the contraction during the first half of the current fiscal. For example, in relation to power generation, electricity distribution boards had been suffering due to lack of funds and low distribution capabilities. A debt restructuring package announced as part of the economic reform package is likely to boost financial viability in distribution and allow companies to invest in better distribution technology. However, turnaround may take a while. While manufacturing had improved in the past few months, concrete implementable measures are yet to be announced on revival of mining and manufacturing sectors with a roadmap for the future. With scams in coal block clearances surfacing during the year, it is likely that sectorial revival will also take time.
In terms of the use based classification, weakness in capital goods, intermediate goods and consumer durables sectors has dragged down the industrial production. To optimize on the untapped potential, the economy needs to focus on a clear cut mechanism for the implementation of the National Manufacturing Policy to revive industrial growth. The 12th Plan, which has approximately doubled the projected investment in infrastructure over the five year period 2012-17 also presents a golden opportunity for the industrial sector.
The IIP numbers are likely to remain muted till core manufacturing and mining data show consistent improvement. While the base effect will continue to impact, we expect the numbers to improve in the last quarter of the current year. Additionally, RBI stance on December inflation data to be released on Monday will play a part in determining the credit trajectory. In the event that a rate cut is announced, the IIP numbers are likely to be affected positively going forward. However, one should note that these are short term readings. For the sector to reach a 7% growth track, focused measures are needed to revive growth, While a wave of reforms have been announced in the past few months, only time will tell how these translate into base level progress.
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The author is a Senior Economist with Deloitte India.