Negative surprise

Last Monday, the Central Statistical Organisation of the Government of India announced that the Indian economy would grow at over 8 per cent during the current year. The following Friday, the same organisation, via the Index of Industrial Production (IIP), revealed that growth in the industrial sector during December 2005 had dropped sharply to 5 per cent over the same month of the previous year. For the period April-December 2005, the sector grew by 7.8 per cent, somewhat below its growth of 8.6 per cent during the first nine months of 2004-05. The most significant contributor to the December performance was the manufacturing sector, which grew at a mere 5.9 per cent compared to 9.8 per cent in December 2004. The momentum visible then continued through the early part of 2005-06, resulting in an April-December 2005 growth rate of 8.9 per cent. However, the estimated growth rate of value added in manufacturing (the monthly index measures production, while the GDP numbers reflect value added) for 2005-06 as per the estimates released last Monday is 9.4 per cent. Value added would grow faster than production when output prices are rising along with production and at a rate faster than input prices. This is clearly not the situation across a wide range of manufacturing sectors today. Rarely has a single week yielded such contrary indicators of economic performance, that too, from the same organisation.

But, contradictions aside, the performance of various components of the IIP also is a cause for concern. First, along with manufacturing, which accounts for about 80 per cent of the index, the other two components, mining and electricity, also showed a significant slowdown compared to last year. Mining actually declined by 1.8 per cent, while electricity slowed from 4.5 per cent in December 2004 to 2.9 per cent in December 2005. Both these sectors also grew at significantly slower rates during April-December 2005, compared with the same period in 2004. Incidentally, this pattern is consistent with the performance of value added in these sectors indicated in the GDP numbers. At the next level, the use-based classification of manufacturing sectors, differentiates between basic, capital, intermediate and consumer goods. Across this classification, intermediate goods and consumer non-durable goods contributed the most to the slowdown in December. Production in the former actually declined, while it was a relatively low 4.8 per cent in the latter, compared with over 12 per cent in the previous year. For the year as a whole, while consumer non-durables grew at a relatively healthy rate, intermediate goods slowed significantly in comparison with 2004-05. This category is at significant variance with the other four and marks it as the major drag on an otherwise robust process.

By and large, the main drivers of the industrial expansion that has now lasted over three years "" capital goods and consumer durables "" appear to be sustaining their momentum. Their performance in December was consistent with their growth during the year so far. However, both these sectors are particularly closely linked to interest rates, which are now on an upward climb, thanks to a tightening monetary stance. Housing finance companies have already raised their lending rates by half a percentage point, which should deter some potential new borrowers. While too much should not be read into one month's numbers, the December pattern supports a spreading perception that the growth momentum may be moderating a bit.