New Delhi: India’s growth in industrial production in March dropped to a six-year low of 3%, a number that, because it comes on the back of inflation which was at 7.61% for the week ended 26 April, suggests that all may not be well with the Indian economy.
The figure for industrial production, sharply below a forecast of 5.8% according to a Bloomberg poll of economists, led to a fall in the Bombay Stock Exchange’s benchmark index, Sensex, by 94.45 points in the course of the day. However, the index recovered to close up 0.74% at 16,860.90 points.
PRODUCTION GROWTH SLACKENS (Graphic)
And, in an announcement that should have brought more cheer to the government, stock market traders and farmers, the India Meteorological Department projected an early arrival of the monsoon, which is expected to be normal this year and key to the kharif (summer) crop, particulary rice.
This could stifle inflationary expectations, especially in view of the bumper rabi or winter crop of wheat.
The Congress-led United Progressive Alliance government has found it increasingly difficult to politically manage the series of macroeconomic reverses, with even some of its allies, particularly the Left parties, being severe on its inability to contain inflation.
India’s official Index of Industrial Production, or IIP, released by the Central Statistical Organisation, registered a growth of 8.1% in 2007-08, the lowest after 7% in 2003-04, triggering fears in some quarters of stagflation—a prolonged period of low growth coupled with high inflation.
Although growth in production slowed across all industry segments in March, the fall was sharpest in consumer durables such as motorcycles, refrigerators and air conditioners, where production fell by 2.1%.
Against a growth of 9.2% in 2006-07, the sector declined by 1% in 2007-08, as credit became scarce for consumers who traditionally rely on bank finance and dealer discounts.
Credit dried up after the Reserve Bank of India, or RBI, took a series of measures to tighten liquidity.
The appreciating rupee, which has hurt exports—in rupee terms exports grew by 9.39% in 2007-08 compared with 25.30% in 2006-07 —has only compounded the problem, although it has depreciated some in the past few weeks.
The decline in consumer demand has, however, been made up partly by a pick-up in investment demand in the economy. According to IIP data, growth in capital goods averaged 16.5% in 2007-08, only marginally slower than the 18.2% recorded in 2006-07. However, with RBI signalling a tight credit regime, companies may begin to roll back investments and thereby impact overall growth in 2008-09.
Growth in infrastructure is flagging perceptibly. In both the mining and electricity segments, growth eased to 3.8% and 3.7%, respectively, in March. And growth in power generation has declined steadily since August 2007, except in November, indicating the constraints on industry.
“Higher interest rates have significantly impacted businesses dependent on consumer loans,” said Sunil Kant Munjal, managing director of Hero Group, which owns Hero Honda Motors Ltd, India’s biggest motorcycle maker.
“There is a need for rates to come down.” However, Pronab Sen, chief statistician of India, said the March dip in IIP growth is a statistical blip—it was lower than expected as it was computed against a production growth of 14.8% last March, the highest that year.
For 2008-09, RBI as well as the finance minister have already forecast 8-8.5% growth in the economy.
The opposition moved quickly to lay the blame at the UPA’s door.
Prakash Javadekar, a Rajya Sabha member and a spokesperson of the Bharatiya Janata Party, said the slowdown was as disastrous as it was expected. “The slide in manufacturing sector is fraught with disastrous consequences for the economy. It was only to be expected given the policies of the UPA government, which have curbed demand. Now, barring the services sector, the economy has already slowed. So much for their claims of high growth.”
And the Left parties have been claiming for some time that the economy is slipping into stagflation.
Dharmakirti Joshi, principal economist, Crisil, disagreed with that prognosis. “It is too early to talk about stagflation,” he said, because demand is still high.
He added that GDP growth wouldn’t be hit much. “Although both the monthly and annual IIP growth figures are much lower than what we expected, it will not lead to any significant notch-down of 2007-08 overall GDP estimates as agriculture provided a positive surprise.”
Notwithstanding this, with a tight monetary stance and adverse global scenario, this trend of moderate industrial growth will continue through 2008-09, Joshi added.
Meanwhile, Manish Tiwari, a spokesperson of the Congress party, sought to deflect the blame and argued that the slowdown was a reflection of the global trend. “Given the growth in India’s export component and the fact that the developed economies are already headed into a recession, our manufacturing sector is bound to take a hit. However, I don’t think the index distinguishes between the international demand and the domestic demand. So long as the domestic demand does not slip to the same extent, we should be able to ride out that phase. The government is doing all it can to contain inflation, so domestic demand should not suffer much.”
The government had, in the Union Budget for 2008-09, announced a series of cuts in excise duties, provided income- tax relief to most people and also announced a Rs60,000 crore waiver on farm loans.
According to Shashank Bhide, an economist with the New Delhi-based National Council for Applied Economic Research, these proposals could “boost consumer spending” and thereby shore up the profits of companies at a time when they are getting squeezed by high interest rates.
(Ashish Sharma and Ruhi Tewary of Mint, and Bloomberg contributed to this story.)