New Delhi: Industrial growth, or factory output, almost halved in the quarter ended June, suggesting that industrial activity in the country is poised to slow.
And, though it grew a better-than-expected 5.4% in June, it was substantially lower than in the same month in 2007.
(To listen to what staff writer Utpal Bhaskar has to say on the IIP figures click below)
In May, it was 4.1%.
Analysts and economists expect industrial growth to decline this year (2008-09) on the back of soaring inflation and high interest rates.
“The number has come in higher than our expectation, but the trend is clearly weakening as a result of higher interest rates, rising input costs and slowing global demand,” said Sonal Varma, an economist at Lehman Brothers, in Mumbai.
See: Signs of strain
Indian stocks fell after the data was released by the Central Statistical Organisation, or CSO, the government’s data arm. The Bombay Stock Exchange’s 30-stock Sensex fell 1.9% to 15,212.13 points.
“There is a concern that, going forward, post-June growth numbers will manifest a further slowdown in investment-led demand,” said Ajay Bodke, a fund manager at IDFC Mutual Fund in Mumbai. “The industrial numbers gave a reason for a correction.”
Economists now fear that the slowdown may be more intense than anticipated, and some of them are looking to revise industrial growth forecasts. While Lehman Brothers has forecast industrial production to grow by 7.5% in 2008-09, HDFC Bank pegged it in the range of 7.5-8%.
“We may have to revise our forecast to 7-7.5% for the current year,” Abheek Barua, chief economist, HDFC Bank, said.
The manufacturing sector, which accounts for almost 80% of the industrial production, grew at 5.9% in June this year compared with 9.7% in the same period a year ago.
And, the capital goods sector, the driver of manufacturing-led industrial growth in any economy, grew at a single digit rate for the second straight month—5.6% in June, following 3.4% in May and compared with 11.3% in April and 23.1% in June 2007.
According to Pronab Sen, chief statistician of India, and secretary, department of statistics, these numbers reflect the supply-side constraint in the capital goods sector. “They (firms making capital goods) just don’t have the capacity to meet the demand. Earlier, you could import, but with growing global demand there is a general scarcity of capital goods supplies. It will be a year before the investments, which they have initiated since 2006, actually enhance their production capacities.”
Not everyone saw doom spelt out in the capital goods numbers. “There has been a lot of fear that the capital goods segment is slowing down. The rebound in capital goods shows that there has been a moderation and not collapse in investment demand,” said Lehman’s Varma.
And, HDFC Bank’s Barua questioned some of the numbers. “Capital goods numbers do not seem to tally with the data we are getting from the companies which shows investment demand has not slowed down. I also can’t figure out the reason for the significant recovery in consumer goods segment from last year’s level, even though interest rates have only been rising. I doubt that it could be sustainable. It seems while data captured for consumer durables is somehow exaggerated, capital goods numbers are lower than one would expect.”
Production in consumer durables, such as automobiles and air conditioners sold to individual consumers, was up by 3.5% in June compared with a decline of 3.6% in the same period last year. And, production of consumer non-durables, such as detergents and soaps, rose by 12.2% in the same period, almost double the 6.3% recorded in June 2007.
The industrial slowdown would affect the government’s tax collections and put more burden on government finances, said Axis Bank in an analysis released on Tuesday. “Over a slightly longer time frame, the slowdown in the capex (capital expenditure) pipelines might lead to supply bottlenecks as the current down-cycle troughs and demand starts increasing, at which point price pressures might again aggravate.”
Much like that assessment, the prevailing sentiment among economists is negative.
Lehman’s Varma said industrial production could further fall because higher interest rates will impact demand for goods. The country’s central bank has increased a key lending rate by 1.25% over the past two months.
In an analysis released on Tuesday, HSBC’s Asian economic team said it expected “the overall trend to be down on the back of rising inflation, interest rates and slowing export demand”.
Reuters and Bloomberg contributed to this story.