Industrial production growth is slowing. That’s the message from the Index of Industrial Production (IIP) for March. Industrial growth has been decelerating continuously in the past few months from the heights it scaled in December. Part of this is due to the base effect, as conditions were very depressed at the end of 2008 because of the Lehman effect. And at 13.5%, growth is still very strong. But the slowdown story is also being told by monthly survey data, which show a month-on-month deceleration in the pace of activity. Seasonally adjusted, the IIP numbers show month-on-month drops in production.
What could be the reason? The numbers show that the rate of growth of capital goods has slowed, hardly surprising given that it was growing at 55% year-on-year in January. The capital goods numbers are volatile, dependent as they are on lumpy capital investment. Consumer non-durables, long a drag on growth, have started to grow. The expected slowdown in consumer durables on account of the excise hikes and the fading out of the Sixth Pay Commission arrears hasn’t happened. Intermediate goods production has slowed, perhaps because the inventory build-up has run its course. It’s also possible that production is running up against capacity constraints in certain sectors.
Illustration: Jayachandran / Mint
The question is whether the lower-than-expected industrial production numbers should soften the magnitude or the pace of policy tightening by the Reserve Bank of India (RBI). In fact, if the slowdown is on account of supply constraints that’s a sign of demand growth, growth that will result in higher core inflation. Friday’s inflation numbers, especially the non-food manufacturing inflation numbers, will of course be a key input. Surveys show that pricing power is back and the service sector is growing strongly. Non-oil imports are growing by leaps and bounds. And with investment demand kicking in and bank credit growing, there’s little doubt that demand pressures are increasing.
But the rationale for an inter-meeting rate hike has been diluted in recent days on account of international developments. The situation in Europe is still not clear and it’s uncertain what impact it will have on global growth or, indeed, on capital flows to emerging markets. The Reuters Jefferies CRB index of commodities is well below its January highs. A serious slowdown seems to be looming in China, if Chinese equity prices are any guide, and that will affect commodity prices. True, RBI’s policy rate is still below neutral, but in the current circumstances it may make sense to be cautious and wait a while before rushing in with another bout of monetary tightening.
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