Waning of the statistical low-base effect pulled the industrial growth rate down to a 13-month low of 7.1 per cent in June. There was significant slowing in the growth among all segments of mining, manufacturing and electricity.
This is the second month in a row when the industrial growth rate has posted a sharp decline, after having been constantly in double-digits since last October.
Finance Minister Pranab Mukherjee said the June growth was below his expectations. “I expected it to be a little better," he said.
Factory growth, as measured by the Index of Industrial Production (IIP), was 11.34 per cent in the previous month of May (down from a rise of 16.5 per cent in April) and 8.32 per cent in June 2009.
| 13-MONTH LOW Index of Industrial Production | |||
| (%) | June ‘09 | May ‘10 | June ‘10 |
| General* | 8.3 | 11.3 | 7.1 |
| Mining | 14.2 | 10.7 | 9.5 |
| Manufacturing | 8.0 | 11.9 | 7.3 |
| Electricity | 8.0 | 6.4 | 3.5 |
| *(Overall growth) Source: CSO | |||
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the sharp deceleration would not impact the overall gross domestic product (GDP) growth projection of 8.5 per cent for 2010-11. "For the year as a whole, it (IIP) does not necessarily have to be in double digits…to achieve 8.5 per cent GDP growth. The industrial growth in June is little bit lower...We did expect deceleration in industrial growth. I will not conclude from the June figure that this is going to be the trend for the rest of the year. A lot of individual components seem to be showing reasonably good growth," he said.
Apart from the base effect, say analysts, the slower rise in industry growth is a result of muted investment cycle recovery, falling government consumption on gradual withdrawal of the earlier stimulus and dampening inventory restocking.
To tackle high inflationary expectations, the Reserve Bank of India (RBI) had tightened monetary policy by increasing policy rates in March, April and July. This had an effect, if marginal, in the slowing.
“This is partly policy-induced, but mainly statistical in nature. Monetary policy tightening has played a very little role in this deceleration. Other factors like muted investment cycle recovery, dampening inventory restocking and falling government consumption have played a part,” said Mridul Saggar, chief economist, Kotak Securities Ltd.
Analysts expect industrial growth to moderate and stabilise at seven to eight per cent in the coming months. Despite the moderation, most expect the RBI to continue its calibrated increase in monetary policy rates.
“On rates, taking into account trends in non-food credit, non-oil imports, inflation and growth, we maintain our view of a further 50 basis points of tightening in 2010. The industrial growth is likely to moderate to the eight per cent range,” said Rohini Malkani , economist with Citigroup India, in a research note.
Industrial growth, after being hit by adverse global economic conditions, had staggered at low single-digit levels in January 2009, picking up in March and entering the double-digit level in October last year. The low base effect, along with economic revival, had helped push the index up from December on, when growth had touched a 20-year high of 17.7 per cent.
On a sectoral basis, growth was led by mining, which grew at 9.5 per cent, followed by manufacturing (7.3 per cent) and electricity (3.5 per cent). Contrary to the trend of the past few months, the use-based categories indicated growth was driven more by consumption than investment. Consumer durables were up at 8.3 per cent, led by 27.4 per cent growth in durables and a marginal growth of 1.3 per cent in consumer non-durables.
On the investment side, trends in intermediate goods remained firm at 8.7 per cent, capital goods slowed to 9.7 per cent, while basic goods (which include cement) decelerated to 3.4 per cent.
