The industrial growth figures for November will be announced on Friday—and they are unlikely to make a pretty picture.
The commerce ministry said on Tuesday that production in six core industries in November was a modest 5.3% higher than it was 12 months ago. This is a sharp and unexpected decline from the 9.6% growth for the same month in 2006. The six core industries —crude petroleum, refinery products, coal, electricity, cement, finished steel—have a combined weight of 26.7% in the benchmark index of industrial production (IIP). The drop in their output growth suggests that final IIP growth in November is likely to be under 7.5%, well below trend. IIP growth from April to October has averaged 9.7%.
Is this a statistical anomaly? National Statistical Commission chairman Suresh Tendulkar seems baffled about the fact that core sector growth is down while the infrastructure sectors that use its output seem to be doing fine. It’s a valid point. How does one explain, for example, the slowdown in cement and steel output growth when there is little sign of a slowdown in new constructions and road building?
That said, there is little doubt that this sluggishness has been building up for some time. The average core sector growth rate between April and November was 6%, compared with 8.9% in the first eight months of the previous financial year.
The most obvious explanation for a slowdown in energy, power, cement and steel amid strong housing and infrastructure spending is that companies are importing inputs rather than buying them domestically. They are being goaded by a strong rupee. This could be happening in the petroleum industry. Crude oil output between April and November has been almost flat. Refining has grown by 8.3% in the same period, however. Trade data does show a sharp rise in crude oil imports —and this could explain the divergence between how much oil is being pumped out of the ground and how much of petroleum products are being spewed out of refineries.
In short, imported inputs could be substituting domestic inputs thanks to the appreciation of the rupee, though this may not apply to items such as cement and electricity that cannot be easily shipped or transmitted across national borders. The economic data that will be put out during the rest of this fiscal year will hopefully clear some of the confusion.
The drop in core sector growth and the expected slowdown in IIP for November are part of a larger set of concerns about the sustainability of economic growth. It is likely that the Indian economy will grow a tad slower this year than it did last year. This is not necessarily a bad thing, since there were some signs of overheating around the same time last year. The central bank has been quite justified in nudging up interest rates to prevent runaway growth from creating capacity constraints that could spark off higher inflation.
But will higher interest rates, a strong rupee and a weakening global economy lead to something more than a moderate slowdown?
There is no cause for alarm right now. But it would be a good idea to be prepared. As Mint reported on Wednesday, the Prime Minister has already set up a high-powered group to recommend what can be done to keep growth and job creation on track.
These are signs that the government is concerned— and rightly so. There are two things to watch out for. One, will stock market investors who have turned a blind eye to every hint to worry take the signs of an industrial slowdown more seriously? Two, will industry lobbies get the government to announce sectoral tax sops to deal with the slowdown in the coming Budget?
We hope the answers are: yes and no.
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