Industrial production rebounded in September, rising by 4.8% y-o-y after slowing to 1.4% y-o-y in August. The rebound was broad-based, with growth of mining, manufacturing and electricity output accelerating in September compared to August.
However, this robust performance could be purely due to a seasonal factor as factories across the country increased production ahead of the Hindu festivals in October. The pace of production in September is therefore unlikely to be sustainable given the backdrop of a deteriorating global outlook.
In fact, the slowdown in industrial production started as early as November 2006 when it was growing at a 15.8% y-o-y pace, compared with the 4.8% y-o-y current rate.
This has weighted on the overall economy over the past two years despite the steady growth of the services sector. Economic momentum, as a result, has been losing steam, despite maintaining a growth rate of around 9.0% in 2007.
However, the slowdown in production activities has accelerated since 2008 amid a sharper slowdown in domestic demand, which was particularly hurt by rising inflation, causing GDP growth to slip further to 7.9% y-o-y in 2Q08, the slowest since 4Q04.
As outlook has become even gloomier since H208, growth is expected to slip further in the next few quarters. We expect GDP growth to slow to 6.0% for FY2009-10 before things can turn better.
A drop in Purchasing Managers’ Index, which normally moves in line with industrial production, has confirmed our cautious view on the economy.
The RBI is clearly aware of the risk facing the economy and is stepping up its efforts to avoid a deeper economic slowdown. It has cut its benchmark repo rate by a total of 150bp since mid October. Meanwhile, the cash reserve ratio was lowered by 350bp to 5.5%, almost giving away all of the increases the RBI delivered during 2007-2008.
We believe the worst is yet to come as the latest set of production numbers are yet to reflect the deterioration in economic outlook from the past two months.
When seasonal factor is out of the way, production is likely to resume its downtrend, putting economic growth under further pressure. The authorities are likely to ease monetary policy further in order to lend supports to the economy.