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Credit crunch pulls down IIP

Credit crunch pulls down IIP
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First Published: Fri, Dec 12 2008. 10 06 PM IST

Updated: Fri, Dec 12 2008. 10 06 PM IST
India joined the ranks of countries with a shrinking industrial sector in October.
Quite a few indicators, such as lower exports, a falling Purchasing Managers’ Index (PMI) and plunging car sales had prepared the ground for the negative IIP (Index of Industrial Production) number, although most were expecting a marginally positive outcome.
October was the month when the credit crunch started to bite and short-term interest rates peaked, so a sharp fall in industrial production during the month was certainly expected.
Data show that consumer goods were hit the most, with the consumer goods index down 2.3% year-on-year. The production of capital goods, however, increased by 3.1%. But the capital goods index fell sharply between September and October 2007, which isn’t true for the consumer goods index, so there’s a base effect at work in the growth rates.
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Economists point out there were also more holidays in October 2008 compared with the previous year.
The manufacturing sector was badly hit, with growth a negative 1.2%. The mining and electricity sectors helped mitigate the fall in IIP.
The contraction is likely to deepen in November, with even more dismal data on car sales and PMI. Moreover, electricity generation didn’t grow by as much in November, as it did in October. According to the Central Electricity Authority, growth in generation went down from 3.79% in October to 2.57% in November.
Bank credit growth has also shown a deceleration in November, implying lower growth in the economy. The terrorist attacks in Mumbai, too, had affected production in November.
Further, anecdotal evidence clearly indicates it’s not just manufacturing that’s been affected, but services, too, is bound to have been affected by the credit crunch and by slowing demand.
The fact that this is the first time in more than a decade we’ve seen a negative growth rate for IIP is a telling reminder that we’re living in extraordinary times and extraordinary policy action is urgently needed. On Friday, the bond and equity markets bet that it will come soon.
Write to us at marktomarket@livemint.com
Graphics by Paras Jain / Mint
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First Published: Fri, Dec 12 2008. 10 06 PM IST