India’s industrial production grew the slowest in eight months, by 9.8%, in June as interest rates that are at a five-year high curbed consumer spending, especially in durables such as motorcycles. But that’s as bad as the numbers underlying the index get, with the other numbers indicating that the India story remains strong.
The manufacturing sector, especially capital goods (large machines typically used to manufacture other products) continued to grow, an indication that the economy continues to and will continue to grow despite some serious money tightening efforts by the central bank, the Reserve Bank of India.
That positive sentiment was evident in data released by the Central Statistical Organization for the first quarter of the fiscal. The index of industrial production grew 11% in April-June 2007 as against 10.5% in April-June 2006; the manufacturing sector grew 11.9% in April-June 2007 as against 11.7% in April-June 2006.
“Clearly, capital expenditure is still high enough, reflecting a strong order position. The interest rate hikes have hardly affected corporates who have access to external commercial borrowing,” says Abheek Barua, chief economist, HDFC Bank.
In 2006-07, Indian companies raised a record $16.1 billion in net external commercial borrowings (ECBs).
On Wednesday, the Indian government instituted curbs on ECBs, and some analysts predict that the world is heading for a credit crunch as the subprime mortgage contagion spreads from its point of origin, US, to Europe and other markets.
In June, though, such concerns were far away. Production of capital goods accelerated to 29% in June over 21.6% in May and averaged 22.3% in the first quarter ended June compared to 21% in the same period in 2006-07.
Economists expect the production of capital goods to peak around the end of the year. Says Pronab Sen, chief statistician of the government, “A lot of companies are reworking their projections, so we won’t see a major deceleration until the end of the year. The growth figures are quite in line with what we were expecting—no surprises here.”
Both Sen and Barua say that “costlier credit is telling on the small and medium entreprises, which have started cutting back output”.
Chetan Ahya, an economist at Morgan Stanley, says that “aggregate capex (capital expenditure) fund raising by the corporate sector rose to a new high of 12.8% of gross domestic product in 2006-07, or $117 billion. But this cycle is close to peaking now,” he adds.
Apart from capital goods, the consumer non-durables sector (essential consumption items such as grocery products), grew too, with production in June 2007 growing 5.4% as compared to 1.8% in June 2006. The production almost doubled in the quarter to June 2007 over a year ago. “That’s because incomes have grown all across, and in some sectors, have kept ahead of inflation,” says Sen.
“Average consumer spending remains high and there has been no major income shock,” adds Barua.
The sector worst hit by rising interest rates is consumer durables, where growth plunged to 0.6% in June 2007 compared with over 19.9% a year ago. And growth in the quarter slowed to a mere 3%, compared to 15% in the quarter to June 2006. Sen says there is little chance of production in this sector actually declining.
Despite June’s industrial growth numbers being at an eight-month low (it was 12.4% in April and 10.9% in May), the quarter’s numbers have prompted an upward revision in projections for the entire year with Delhi-based economic think tank National Council of Applied Economic Research (NCAER) revising it to 9% from 8.7%. “Even GDP (gross domestic product) prospects for the year have improved,” says Shashanka Bhide, NCAER’s senior research counsellor. On Friday, NCAER raised its GDP estimate for 2007-08 to 8.53% from 8.3%.
However, concerns over the impact of the current global credit crisis remain. Business confidence in India, NCAER says, has declined to 137.9 in the quarter to September from 151.3 in the quarter to June. The measure is based on a survey of 493 companies.
(Bloomberg’s Cherian Thomas contributed to this story.)