Slowdown takes hold

The Index of Industrial Production (IIP) for January 2008, released yesterday, suggests that the industrial slowdown has really taken hold. The index grew by a paltry 5.3 per cent over January 2007, compared with 11.6 per cent a year ago. This brings the growth rate for the first 10 months of 2007-08 to 8.7 per cent, significantly below last year's 11.2 per cent. Within the index, the manufacturing segment, accounting for almost 80 per cent of the index weight, slowed considerably from 12.3 per cent in January 2007 to 5.9 per cent a year later. This takes its growth rate for the year to date to 9.2 per cent, down from an impressive 12.1 per cent last year. The electricity segment also slumped from a growth rate of over 8 per cent in January 2007 to just above 3 per cent in January 2008.

As striking as the aggregate numbers are, it is the pattern across segments within the manufacturing sector that truly reveals the extent of the slowdown. Although 15 out of 17 segments have recorded positive growth during January, one segment, jute and other vegetable fibre textiles, has grown by an astronomical 281 per cent! This segment carries such a small weight that it hardly makes any difference to the aggregate, but such a large figure has clearly moved up the overall growth rate. One of the stellar performers during much of the year, wood and wood products, has now come down to earth, actually declining by 4.6 per cent, but still maintaining a year-to-date growth rate of over 55 per cent. The most important development across segments is the sharp decline in the growth rate of machinery and equipment, which in previous months had maintained double-digit growth, though moderating. For the latest month, this segment has actually declined by 3.8 per cent, taking its year-to-date growth to just over 10 per cent. It is too early to see this as a sign of an investment downturn, but the magnitude of the decline in the space of just one month is cause for concern. Other key categories, such as transport equipment and consumer durables, have continued on their sluggish note, the former barely growing and the latter recording a decline for January as well as for the year-to-date. A similar pattern prevails in textile products, which are dealing with the impact of the rupee appreciation on export earnings.

These numbers add considerably to the grimness of the macro-economic scenario, and cast some doubt over the government's optimism with regard to economic growth next year. The inflation rate has just crossed the 5 per cent mark, leading analysts to forecast that the Reserve Bank of India (RBI) will not risk an interest rate cut. The IIP numbers, seen in isolation, unambiguously support the argument in favour of a cut. The two developments together put the RBI on the horns of a dilemma. Inaction now is very likely to reinforce the slowdown in the months ahead. However, a rate cut may well add to the inflationary pressures being exerted by energy and food prices, but given the levelling off of demand, this is not a serious risk. Business Standard has been arguing in favour of a rate cut on the twin premises that the growth risk outweighs the inflation risk and that much of the inflation is caused by cost-push factors (in energy, metals, food items) that will not be influenced by monetary policy. Both premises remain true. If the RBI is veering round to that position, the time for a cut is now rather than at the scheduled quarterly review in April.