Demands from experts and industry lobby groups for stronger fiscal and monetary measures strengthened after the government data today showed that India’s industrial production dipped 0.4 per cent in October, the first negative showing in 15 years.
The dip in manufacturing, which accounts for a nearly 80 per cent weight in the Index of Industrial Production (IIP), is the main reason for the decline in factory output.
The Bombay Stock Exchange’s (BSE’s) Sensitive index fell nearly 400 points before the IIP numbers were announced but recovered sharply from the day’s low of 9,282 points to close at 9,690 points, an increase of 0.46 per cent over Thursday’s close.
The government is expecting a further dip in November and officials said the fiscal stimulus package announced last Sunday had factored in the contraction.
“The government has taken note of the slowdown in IIP, which appears to be continuing in November as well. This is a matter of concern. The economic package was released by the government against this backdrop,” said Commerce Secretary Gopal K Pillai.
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With three leading indicators — export growth, automobile sales and credit offtake — showing sharp declines in their latest numbers, experts said industrial production would continue to be sluggish.
Exports fell 12 per cent in October, and preliminary commerce ministry estimates indicate a further dip in November. Automobile sales in November fell 19 per cent, and incremental non-food credit offtake also declined sharply to Rs 25,000 crore between October 11- November 21 this year against Rs 1,44,000 crore in the September-October 10 2008 period, according to private sector YES Bank’s calculations.
“The IIP will remain in the negative zone in the quarter ending December because the entire impact of the credit crunch will be seen in these months. Incremental non-food credit growth is seen correcting rapidly,” said Shubhada Rao, chief economist with YES Bank.
In terms of major industries, basic chemicals and chemical products posted a production dip of 5.5 per cent, leather and related products dipped 18.1 per cent, transport equipment and parts dipped 6.1 per cent. Textiles dipped textiles and apparels fell 4.6 per cent.
In terms of use-based classification, except for two categories — basic and capital goods — the remaining four categories (intermediate, consumer, consumer durables and consumer non-durables) were in the negative territory.
| NO LIGHT IIP growth in October | ||||
| Sector | Oct 07 (% growth) | Oct 08 (% growth) | overall Apr-Oct 07-08 (% growth) | overall Apr-Oct 08-09 (% growth) |
| Mining | 5.1 | 2.8 | 4.9 | 3.7 |
| Manufacturing | 13.8 | -1.2 | 10.6 | 4.2 |
| Electricity | 4.2 | 4.4 | 7.2 | 2.8 |
| Overall | 12.2 | -0.4 | 9.9 | 4.1 |
| Source: CSO | ||||
Demand for monetary easing: Last Saturday, the Reserve Bank of India (RBI) reduced repo (the rate at which it lends to banks) and reverse repo (the rate at which RBI borrows from banks) rates one percentage point each.
Now, experts are demanding a further cut when the RBI reviews the monetary situation in January. “We continue to expect the Reserve Bank of India to ease both the repo and reverse repo rates by 150 and 100 basis points respectively by end-March 2009,” said Goldman Sachs analysts Tushar Poddar and Pranjul Bhandari in a note released today.
The RBI and central government, which have acted in concert in announcing measures to tackle the slowdown, are expected to announce more steps. Commerce Minister Kamal Nath said the government would announce a second round of fiscal measures next week.
RBI governor D Subbarao recently said in Kolkata: “The situation demands actions, both on the fiscal and the monetary side. Both the government and central banks are acting in coordination.”
FMCG springs a surprise: The 2 per cent dip in consumer non-durables or fast moving consumer goods (FMCGs) has caught many by surprise. Traditionally, this segment is the last to be affected, being ‘non-discretionary’ expenditure (in other words, people have to buy toothpaste, soap and other items).
Two reasons are being cited for October’s fall. One, this segment grew at record 15.8 per cent in October 2007 leading to high base effect. Second, there could be some error in data capturing.
However, a look at the index number for this group reveals it has declined on a month-on-month basis by 6.7 per cent to 240.8 in October 2008.
GDP estimate to hold for now: Growth estimates of gross domestic product (GDP), the sum total of all goods and services produced in a country, are likely to hold for now. Economists say though the October IIP numbers caught them by surprise, they had factored in lower factory output number for fiscal 2009.
Industrial activities account for around 25 per cent of India’s output, and a slowdown in manufacturing could affect the overall growth numbers. “We still believe GDP growth rate would be between 6.5 and 7 per cent in the second half,” said D K Joshi, economist with Crisil Ltd, a ratings and advisory firm.
“We stick to our projection of 6.9 per cent GDP growth in 2008-09 since we expect an IIP growth of about 4 per cent this fiscal,” said Shubhada Rao.