Double-digit expansion may prompt RBI action.
The country’s industrial output rose at its slowest pace in seven months in May. However, at 11.52 per cent, it stayed in double digits for the eighth consecutive month, heightening expectations that the Reserve Bank of India would raise interest rates later this month.
The May figure marks a considerable dip from the 16.52 per cent recorded in the previous month.
Analysts and policy makers said the deceleration was expected, as the high double-digit growth had been affected by the statistical base effect and was not sustainable. “Nobody should expect that the manufacturing sector will continue to grow at an abnormally high number for a long time. There are capacity concerns,” said Finance Secretary Ashok Chawla.
Industrial output for April, as measured by the Index of Industrial production (IIP), was revised downwards from 17.6 per cent to 16.52 per cent. The growth in the first two months of the financial year (April-May) is at 14 per cent, against 1.4 per cent during the corresponding period in 2009.
| BELOW EXPECTATIONS | |||
| Figures in % | May ‘09 | April ‘10 | May ‘10 |
| General | 2.10 | 16.05 | 11.52 |
| Manufacturing | 1.84 | 19.36 | 12.32 |
| Mining | 3.38 | 11.36 | 8.72 |
| Electricity | 3.26 | 6.01 | 6.41 |
According to Chawla, “Whatever output lag was there in the economy has been filled and the manufacturing sector is now showing the kind of average secular growth which continues to be good and would be favourable for the economy.”
Experts said production growth during the month was still significantly above the trend rate. “The IIP is now coming back to its normal level of 10-12 per cent growth. The increase in the capital goods segment is a good sign. What this means is that there is investment demand and so we can expect a growth in investments in the coming months,” said Rajiv Kumar, chief executive of the Indian Council for Research on International Economic Relations.
Experts also maintain that curtailing inflationary expectations was the priority of the Reserve Bank of India (RBI). Accordingly, most expect RBI to further raise policy rates by 25 basis points in the monetary policy review on July 27. “We have been maintaining that RBI will go for a 25 basis points hike in repo and reverse repo rates (RBI's short-term lending and borrowing rates) on July 27. IIP will have no impact upon it," said D K Joshi, principal economist with research agency Crisil India Ltd.
Based on sectoral breakdown, manufacturing production grew at 12.3 per cent, decelerating from 17.9 per cent in the previous month. Mining and electricity production grew at 8.7 per cent and 6.4 per cent, respectively, down from 11.7 per cent and 7.9 per cent in April. However, growth in all the three sectors was significantly higher than the growth registered during the corresponding period in 2009.
Production of basic, intermediate and capital goods grew at 7.9 per cent, 10.2 per cent and 34.3 per cent, respectively, during the month. Consumer goods continued to register robust growth at 8.2 per cent, with consumer durables growing at 23.7 per cent in the month under consideration.
However, production of consumer non-durables, which grew at a meagre 2.4 per cent in May, remains fairly sluggish and constrained by high inflation.
“The breakdown from the initial estimates indicates the slowdown was sharp and isolated in a few areas, rather than broad-based. While production of most goods slowed, by far the biggest contributor to slumping growth was production of capital goods, which eased to 34.3 per cent from 69.9 per cent in April,” said Nikhilesh Bhattacharyya, associate economist, Moody’s.com.
He said he expected the coming quarter’s growth in industrial production to remain strong, though it may continue to moderate. “Rising interest rates and monetary tightening measures will also weigh on consumer credit,” he said.
