Affirming recent apprehensions, industrial growth, led by manufacturing, dropped sharply to 5.3% in November, the slowest in the last 13 months.
Manufacturing, the mainstay of the Index of Industrial Production which measures industrial growth and brought out by the Central Statistical Organisation, saw a marginally higher growth at 5.4%.
Economists blamed it on the seasonal fatigue in consumer demand following heavy purchases in the festival month of October, but data reveals that there has been a secular deceleration throughout the current financial year.
Industrial growth averaged 10.3% in the first quarter ended June, 8.6% for the second quarter ended September, while manufacturing grew at 11.1% and 8.9%, respectively, over the same period.
There is now a growing concern that progressive increases in lending rates to curb inflation, together with the appreciation of the rupee has begun to impact the economy.
Earlier this week, Prime Minister Manmohan Singh asked a group of senior officials to suggest immediate measures to arrest the decline.
Expectations are high of an easing monetary policy from the Reserve Bank of India (RBI), ahead of its third quarter review on 29 January, especially with finance minister P. Chidambaram, in his meeting with state-owned bank chiefs last week, saying that he would “like” interest rates to come down.
Chetan Ahya, economist with Morgan Stanley investment bank, said: “The November growth, on the back of a 12% rise in October, was below our and market expectations.”
Manufacturing, which accounts for 16% of the gross domestic product (GDP) and has a weight of more than 79% in the IIP, grew by 12.5% in 2006-07 despite tightening credit. This fiscal year, it has slowed to 9.8% at the end of November.
Consumer durables production, which declined by 4.1% compared with a growth of 10.1% a year ago, is the sector worst hit by the costlier and scarcer credit. Dharmakirti Joshi, principal economist with rating agency Crisil Ltd, said: “This year, IIP growth has been highly volatile and on a generally declining trajectory as a consequence of tighter credit. The overall deceleration in growth will only intensify in the coming months.”
In fact, November shows an all-round decline in all sectors of industry, including mines which showed better growth mid-year than the 3.5% recorded in November, as well as in consumer non-durables such as groceries, the production of which, too, has fallen by 2.1%.
This has also affected the general corporate sentiment. The Dun and Bradstreet Composite Business Optimism Index for January-March showed a decline of 12.6% from the previous quarter.
The only sector that has significantly bucked the trend is capital goods, where production has grown 20.8% in April-November compared with 17.4% in the same period last year.
“Capital goods is growing faster than it did last year. This keeps hopes of medium term sustainability of over all industrial growth alive,” said Joshi.
Like Joshi, Saumitra Chaudhuri, member of the Prime Minister’s Economic Advisory Council (EAC), too believes that industrial growth would pick up in December and February. “Most factories face a worker shortage post festival due to extended holidays. Cane crushing, for instance, was resumed only at the end of November in almost all sugar plants,” Chaudhuri said.
EAC has projected a 9.7% growth for the year, an estimate that’s much more optimistic than the 7.5-9% expected by most other agencies.
Even though most economists didn’t feel the growth slump would trigger a rate cut, some felt that even no action by RBI on 29 January would be enough to signal an easing of the credit crunch.