Expected deceleration

Most forecasts of GDP growth during the current year put it at being lower than last year's scorching pace of 9.4 per cent. The advance estimate for growth during the first quarter (April-June) was 9.3 per cent, providing no indication that any moderation had begun, but also suggesting that, if the annual forecasts were right, a relatively sharp slowdown would manifest itself in subsequent quarters. As it turns out, we didn't have to wait too long for this. The July numbers for the Index of Industrial Production (IIP) reveal a significant reduction in growth rates compared to last year. Industrial production grew by 7.1 per cent over July 2006, in sharp contrast to the 13.2 per cent growth that had been clocked a year earlier. Manufacturing output was the biggest contributor to both the last year's pace and this year's decline, growing by 7.2 per cent between July 2006 and July 2007, compared to over 14 per cent a year earlier. Over the period April-July 2007, the overall index grew by 9.6 per cent, the first dip below the 10 per cent mark this year, while manufacturing growth slowed from 12.3 per cent to 10.3 per cent. While the July number is partly the result of the relatively high base of last year, the four-month growth rate does indicate a moderate deceleration from last year's high benchmark.

Looking at the numbers for specific industries, it has been pointed out in past editorial comment that the good performance during the April-June period was the result of a somewhat lopsided pattern, with relatively minor industries like wood products and food products contributing disproportionately to the overall growth rate. These two drivers appear to have come back down to earth. Wood products grew by about 21 per cent over July 2006, taking its four-month growth rate to a still blistering 72 per cent, while food products actually declined by about 4 per cent, to record a four-month performance of just under 20 per cent. Among the major industries, transportation equipment continued on its cyclical downturn, with production declining by 3 per cent over July 2006; the industry's four-month performance showed virtually no growth over the corresponding period last year. Another industry with negative growth was metal products; though, somewhat paradoxically, basic metals performed quite well, growing by over 17 per cent over July 2006. A key sector reflecting the contribution of investment activity to the buoyancy of the economy, machinery and equipment, grew by 7.7 per cent over July 2006, a considerable decline over its close to 20 per cent growth during the April-June quarter. The textiles and garments sectors also turned in a relatively subdued performance. Overall, capital goods slowed somewhat compared to the previous year, while consumer durables displayed negative growth after a very buoyant performance last year.

Take away the base effect from July 2006 and the deceleration appears both moderate and entirely predictable. Rising interest rates and, more recently, the rupee appreciation, both contribute to a decrease in demand, more so for some sectors than for others. Several of the sectors that have contributed to the overall deceleration are sensitive to one or both of these variables. From a policy perspective, taking into account the good monsoons and their favourable impact on food prices, the IIP numbers for July point to an end of the monetary tightening phase, at least for the time being.