The index of industrial production, or IIP, is a notoriously volatile series. But it serves to confirm the slowdown in the Indian economy. As Figure 1 shows, the economy’s quarterly growth rate has steadily dipped for each of the past five quarters, from 9.2 per cent in the quarter ending March 2011 to 5.3 per cent in the quarter ending March 2012.
In Figure 2, the volatility of the IIP series is evident, but the trend is also clear. Growth in the overall series has dipped to -1.8 per cent in the last month for which data has been collated, June 2012. (The last set of data was released on Thursday.) The broader industrial-sector figure reflects the slowdown in the index’s largest component, for manufacturing, which is also seen in Figure 2. Like the overall IIP, growth in manufacturing had dipped into negative territory towards the end of 2011 and again in the middle of 2012, managing recoveries between both dips that were both anaemic and short-lived. It is unlikely that recovery is a possibility so soon this time; the capital-goods production index, also seen in Figure 2, is showing sustained negative growth, and has hit -27.8 per cent in July 2012. Clearly, the Indian economy has a problem with investment. (Click for table & graphs)
Some of the reason why investments have slown down are visible in Figure 3, which is drawn from a sample of 1,496 companies with up-to-date quarterly results. Profit before depreciation, interest and taxes have dropped; but interest costs have gone up sufficiently of late that net profit has seen a particularly sharp drop, to 4.06 per cent from close to 10 per cent in the quarter ended March 2011. High interest rates are clearly hurting Indian manufacturing, and thus growth.
