Industrial growth, as measured by the index of industrial production (IIP), slumped to an 18-month low of 2.71 per cent in November 2010. The performance of the manufacturing sector, which constitutes almost 80 per cent of the headline index, was particularly worrisome.
Last year’s high base — industrial growth stood at 11.3 per cent in November 2009 — coupled with the impact of interest rate increases, inflationary pressures and a moderation in export growth all weighed down IIP growth during the month.
Though the data released today by the Central Statistical Organisation were below analysts’ expectations, a sharp decline had been anticipated.
The only silver lining: Growth for the previous month of October was revised upwards to 11.29 per cent from an earlier estimate of 10.76 per cent.
Finance Minister Pranab Mukherjee expressed concern about the slump in industrial production, saying high inflation was one of the contributors. “If IIP goes down and inflation goes up, it will have an adverse impact. But I am not coming to any premature conclusion… We have a look into and take corrective steps so that IIP numbers revive in the remaining four months,” said Mukherjee.
By sector, manufacturing growth slowed to 2.3 per cent in November from 11.9 per cent in October. Growth in mining eased slightly from 6.5 per cent in October to 6.0 per cent in November. Growth in electricity generation also slowed down to 4.58 per cent from 8.8 per cent in the previous month. Except electricity, growth rates in both mining and manufacturing decelerated, compared with the corresponding period of 2009.(Click for graph)
Planning Commission Deputy Chairman Montek Singh Ahluwalia, however, played down concerns, saying he is confident GDP growth would end the current financial year at over 8.5 per cent. “I am not concerned about the low November (IIP) number. This is month-to-month volatility. We are on track as far as GDP growth is concerned,” said Singh.
Analysts, however, were not as upbeat. "The numbers reveal a clear slowdown in manufacturing activity, even after considering the base effect. Since IIP registered a very positive growth in December 2009, data for December 2010 are likely to reflect a slowdown in industrial activity," said Shanto Ghosh, principal economist, Deloitte India.
However, others point out that given the strong cumulative growth rate of 9.5 per cent in the April- November 2010 period, against 7.4 per cent in the year-ago period, things may not be as bad as they appear.
"Looking solely at headline growth can give a distorted impression. Looking at the cumulative growth for the fiscal provides a distinctly more positive impression, underscoring the solid momentum within India's manufacturing sector," said Matt Robinson, senior economist with Moody's Analytics.
By product type, consumer goods output declined by 3.1 per cent in November 2010, compared with an increase of 10.1 per cent a year earlier. Production of basic goods and capital goods stood at 4.5 per cent and 12.6 per cent, respectively, against 6 per cent and 11 per cent.
Consumer durables registered a significant deceleration in the month to 4.3 per cent, against 36.3 per cent in the corresponding period of 2009. The consumer non-durables sector, which has not rebounded robustly since 2008, contracted by 6 per cent in November, against 2.3 per cent growth a year earlier. Analysts expressed concern over the decline in this sector, as it indicates a slowing momentum in the rural economy.
Despite the slump in industrial growth, analysts maintain that the Reserve Bank of India (RBI) is expected to raise key policy rates in its January monetary policy review.
"While an 18-month low headline might otherwise suggest the central bank should hold off further monetary tightening in the months ahead, the still strong cumulative growth rate underscores the propensity for the Indian economy to absorb further interest rate increases," Moody's Analytics Senior Economist Matt Robinson said.
State Bank of India Chairman O P Bhatt, however, felt this might not be an appropriate time to hike policy rates. "If you look at what has happened to the stock markets, if you look at the uncertainty, a rate hike at this point of time might add to all this."
Industry chambers like Ficci and CII asked RBI to pause monetary tightening measures in order to maintain the industrial growth momentum.
