Was the strong growth in manufacturing in August a blip, and do the September Index of Industrial Production (IIP) numbers confirm the slowing trend in manufacturing seen since June?
That confirmation seems to be provided by the fact that only wood and wood products and basic metal industries, out of the 17 industries in the two-digit level classification, showed double-digit growth in September, compared with as many as seven industries with double-digit growth in August.
Growth in all segments— basic, intermediate and capital goods—slowed, with capital goods production falling to 18.6%, compared with 30% year-on-year in August. The key change this time has been that growth in the consumer goods index, which is much less volatile, has slipped into negative territory— the biggest fall being in consumer durables.
But the slowdown in capital goods has been evident for quite some time. The main reason for the slowdown in September appears to be a deceleration in the capital goods index. Nor is this limited to transport equipment and parts, the production of which fell by 1.6% year-on-year in September. Production of machinery and equipment other than transport equipment was also down to a mere 4.4%, compared with a growth of 10% in August.
But the capital goods index is very volatile and one month’s slowdown proves nothing, as seen from the chart.
That a slowdown is under way is also seen from the banking data, with the latest Reserve Bank of India (RBI) data showing bank credit growth at 22.5%, compared with 28.5% during the same period last year. Consumer and housing loans have been the most affected—a reflection of the slowdown in consumer goods production in the IIP. Notice also how banks have been busy reducing deposit rates in recent weeks, another indication that credit demand has been tepid. The second quarter corporate results also show a further deceleration in the pace of earnings growth.
Will the sharp slowdown in industrial production seen in the September IIP numbers allow RBI to relent on interest rates?
That seems unlikely because of several reasons. High international crude oil prices are one obvious reason and there’s also the worry about capital inflows. Money supply growth continues to be at a high 22.5%, mainly because of an increase in the net foreign exchange assets of the banking sector. Under these circumstances, it will be difficult for the central bank to cut rates.
The question is: Has the stock market dealt with the increasingly clear evidence of a growth slowdown? Perhaps it has, which explains the narrowness of the recent rally. The stock market has discounted the two-speed economy, with the Bombay Stock Exchange capital goods index and infrastructure and power stocks far outstripping the rise in the Sensex.
More on decoupling
It has long been an article of faith among most economists that the US current account deficit is the mirror image of the Chinese and Japanese current account surpluses. That is because, so went the story, the US consumed while the Chinese and Japanese produced. This “global imbalance”, they said, couldn’t continue indefinitely and it was necessary to mend matters.
Well, if the latest numbers are anything to go by, the US trade deficit is slimming down rapidly. The September trade deficit came in at $56.5 billion (Rs2.22 trillion)—the lowest in two years. The fall in the dollar has undoubtedly contributed a lot to that and it has helped offset the weakness at home, reflected in slowing import growth.
Despite the lower US deficit, China’s October trade surplus hit a record, in spite of a sharp rise in imports. In addition, Japan’s September current account surplus widened that month to the second highest on record.
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