New Delhi: Industrial production expanded in May by 11.1%, marginally slower than the 11.7% growth a year ago even as key sectors, such as capital goods and consumer products, posted healthy increases inspite of tightening credit and an appreciating rupee.
“This just shows that our growth story is still valid and a real slowdown is still some way off,” said Pronab Sen, chief statistician and secretary in the ministry of statistics and programme implementation, which releases monthly data.
The slowing growth may, however, prompt the Reserve Bank of India to keep the status quo on interest rates, some experts said, noting that credit growth is finally slowing to 25%. As a result, some are betting that the bank’s 31 July monetary policy review meeting will not make much news.
Dharmakirti Joshi, director and principal economist, CRISIL Ltd, said, “The investment activity is still strong and undented by high interest rates, with both the capital goods and machinery and equipment segment growing over 22% each.” Companies, he said, “seem to be relying more on ample cash reserves and equity markets to fund investment activity.”
Meanwhile, the sharply lower growth of 11.9% in manufacturing industries, compared with 13.3% a year ago, pulled down the index of industrial production (IIP), but the loss was made up to a large extent by both mines and power generating units, which accelerated by 3.7% and 9.4%, respectively, compared with 2.9% and 5% a year ago. The manufacturing sector accounts for 79.36% of the weight of the overall index of industrial production, which went up to 264.2 from 237.9.
Industrial growth also slowed compared with April this year, figures for which were sharply revised downwards from 13.6% earlier to 12.4%. That happened, Sen said, because of delay in receiving data from industries that experienced the sharpest dip. According to latest data, manufacturing industries grew 13.7% in April. In fact, owing to revised data, April growth in all the 17 industry heads under the two-digit classification has undergone major changes, rising four times in the case of jute and other textiles, for instance. S.K. Nath, director general, Central Statistical Organisation, conceded that April figures have undergone major changes, while Joshi said that the changes “undermined the reliability of the IIP numbers”.
In both April and May, textiles, food products, machinery and wood and wood products grew the most. Transport equipment and small manufactures grew the slowest, “mainly owing to the impact of higher interest rates”, said Rajeev Malik, economist with JPMorgan Chase Bank.
Growth in consumer durables—the sector usually is the first to be hit by a credit squeeze and inflation—slowed to 5.2% in April and further to 2.6% in May over 17.5% a year ago. “There is a significant slowdown across the board in the retail sector,” said Abheek Barua, HDFC Bank Ltd’s chief economist, “since a lot of it is based on leveraged growth.”
But the consumer goods sector expanded 12.5% after a strong 19.3% in April, signifying that spending pressures continued despite inflation. However, it’s the capital goods sector that’s showing up as the real growth story, expanding at 22.9% over 21.4% in May 2006 as well as over 13.9% in April. Sen said April production figures, to some extent even May, usually reflect a bit of seasonality, as tax payouts take effect.
By that count, a higher growth in May highlights stronger showing of the capital goods sector. “There is so much traction in capex that it doesn’t seem likely to stop or slow down this fiscal,” Barua said. “The tempo may continue well into the next fiscal.”
Sen said the main reason why the capital goods sector was unlikely to see any impact of the interest rate was because investments in the sector were mostly long-term contractual obligations, with only a small part going to fresh proposals. “Over time, one would probably see a declining ratio between investment in the pipeline and fresh proposals but that won’t happen anytime soon,” he added.
There are important signs of slowdown, however. Auto sector has slowed considerably since April; so has credit growth, railway freight and cement dispatches. Malik also said that “while spending on physical infrastructure and capex will continue to be strong, the impact of monetary tightening on interest-sensitive sectors such as autos, and the anticipated hit to exports from a rising rupee, will be important offsetting forces”.
Kush Verma contributed to this story.