New Delhi: India’s industrial output fell at its fastest annualized rate in 14 years, despite tax cuts and fresh spending programmes announced by the government in December and January to boost domestic demand. Meanwhile, wholesale price inflation inched closer to zero.
Some economists believe that the drop in industrial production will set the stage for another round of rate cuts by the central bank. The Reserve Bank of India (RBI) has reduced the repo rate, or the rate at which it lends short-term money to banks, by 4 percentage points since October, to make it easier for firms and consumers to invest and spend.
Shrinking: A cold rolling mill of Tata Steel. Manufacturing, which constitutes 80% of IIP, contracted by 1.4% in February.
Data released by the Central Statistical Organization (CSO) showed that factory output shrank 1.2% in February, on weak global and domestic demand. This is against a growth rate of 9.5% during the same month a year ago. Industrial output thus grew 2.8% during April-February, against 8.8% in the same period a year ago.
Manufacturing, which constitutes 80% of IIP (Index of Industrial Production), contracted by 1.4% in February, as production of basic, intermediate and consumer goods shrank compared with a year ago. The only surprising element was the double- digit growth in the capital goods output (10.4%), driven mostly by government spending.
Among the industry groups, only eight out of 17 expanded output. The industry group “machinery and equipment” has shown the highest growth of 15.6%, followed by 12.6% in the “other manufacturing industries” group.
Also See Falling Output (Graphic)
Economists said the data is on expected lines as exports in February had shrunk for the fifth month in a row, by 21.7%. “February industrial output data does not surprise. Capital goods and machinery equipment are doing well. This has been triggered by frontloading of government spending in the infrastructure sector. However, it may not continue for long as there is no indication of private investment looking up. Industrial production will remain subdued in the next couple of months before it starts looking better in the second half of the current year,” said Crisil Ltd ’s principal economist Dharmakirti Joshi.
Also See Cooling Off (Graphic)
Even though CSO has esimated gross domestic product (GDP) to grow at 7.1% in 2008-09, Planning Commission deputy chairman Montek Singh Ahluwalia and Prime Minister’s economic advisory council chairman Suresh Tendulkar recently revised their growth forecast to 6.5-7%, on the back of a larger-than-expected contraction in trade. The Indian economy grew at an average rate of 8.9% from 2004-05 to 2007-08.
Last week, the Organisation for Economic Co-operation and Development (OECD) and the Asian Development Bank (ADB) projected India’s GDP growth to decelerate to 4.3% and 5% in 2009, due to worsening consumer and business sentiments. However, both ADB and OECD have said that India’s economic growth would bounce back in 2010, with a projected gradual recovery in global economy in the second half.
Economic affairs secretary Ashok Chawla on Thursday said the contraction in factory output was mainly due to lower output in export-linked sectors even though domestic demand is still robust. “Sectors showing poor performance are those having export linkages like textiles and leather. Mining is not doing well because of lower demand for ores,” Chawla said. The mining sector contracted 1.6% in February.
Even as commercial banks have expressed their reluctance to cut interest rates further, economists believe RBI may further soften policy rates as a signalling device during its annual monetary policy review on 21 April. “The Reserve Bank of India may cut repo rate by another 50 basis points,” Joshi said.
After meeting RBI govenor D. Subbarao, Indian Banks’ Association chairman T.S. Narayanasami on Wednesday said there was not much room for lending rates to come down immediately as banks’ cost of funds was still high.
The inflation rate based on wholesale prices, also released on Thursday by the department of industrial policy and promotion, declined to the lowest in two decades at 0.26% for the week ended 28 March, from 0.31% in the previous week. “Inflation rate will enter negative territory within two weeks and will remain there for at least three-four months,” Crisil’s Joshi said.
However, with consumer inflation for industrial workers running at 9.6% in February, economists don’t see the possibility of any sustained deflation in the Indian economy.
Sherman Chan, an economist with Moody’s Economy.com, believes India’s inflation outlook is not free of upside risk. “Global oil prices have slumped since July, but are bound to pick up once economies around the world begin to recover. High commodity prices could then once again fuel inflation in India. Therefore, India is not expected to experience deflation, which is defined as a sustained period of price declines,” she said in a statement released on Thursday.
Graphics by Ahmed Raza Khan / Mint
Reuters and Bloomberg contributed to this story.