That the industrial production numbers for August would show a bounce from the July lows was never in any doubt. The seasonally adjusted ABN Amro Purchasing Manager’s index for August had posted the strongest improvement in nine months, the infrastructure index showed a year-on-year growth of 9% during the month, the highest this fiscal and non-food bank credit had shown signs of picking up.

But whether the growth will be sustained is another matter. The index of industrial production had moved up sharply last September, so there will be the impact of a higher base for this year’s September figures. More significantly, credit growth during the two weeks to 28 September hasn’t been good, with the result that credit growth during the month has been lower than in the same period last year. Non-food credit growth had been picking up in July and August, but that trend now seems to have once again reversed. The upshot has been a fall in the year-on-year growth in bank credit from 23.9% at the beginning of September to 21.9% by its end.

Manufacturing growth has also been very lopsided, with consumer goods production rising by a mere 0.5% year-on-year, which, as HSBC economist Robert Prior-Wandesforde points out, is the weakest rate since October 1998 (not counting the ­Diwali distorted numbers of last October). In contrast, capital goods production was up 30%.

Six out of the 17 manufacturing sectors in the IIP, accounting for a quarter of the weight in the index, had rates of growth of less than 5%, with metal products and parts and textile products showing negative rates of growth. Five sectors—wood and wood products, basic metals and alloys, basic chemicals and chemical products, machinery and equipment, and rubber, plastic, petrochemicals and coal products—with a weight of 49.7% in the manufacturing index, accounted for 78% of the growth in manufacturing in August.

The mining index, with a weight of 10.5% in the IIP, has showed an abnormal rise of 17.1% in August, but that’s purely because of the base effect—this index fell drastically in August 2006. The good news is that the transport equipment sector bounced back smartly in August, a trend also evident from the rising car sales numbers.

There’s little doubt, however, that some parts of the economy have been affected by the rise in interest rates and the rupee’s appreciation. A report by Enam Securities says 8,00,000 jobs could be lost in the textile sector alone due to the export slowdown, while small and medium enterprises, which employ 85% of the labour force, have also been hurt because their exports have been hit and their borrowing costs have gone up by around three percentage points. No wonder, the finance minister says he is worried about the currency and has asked banks to reduce interest rates.

At the same time, banks are flush with funds, thanks to huge inflows into the country. For the fortnight to 28 September, deposits increased by as much as 3.1%, pushing down the credit-deposit ratio to 70.71%, from 71.39% on 14 September. Net foreign exchange assets of the banking sector have gone up sharply. That explains the eagerness of banks to reduce both credit and deposit rates.

The numbers convey a clear message: industrial growth has been very uneven and there are pockets of distress. The stock market indices mirror the underlying trends in the economy, with capital goods doing well, while consumer goods and export stocks languish. Even metals stocks have had a good run—the BSE Metals index is up 70% year-on-year, while the FMCG index is up 5% and the IT index is down 2%.

The Reserve Bank of India (RBI) has been vigorously defending the dollar—forex reserves are up $15 billion in the two weeks to 5 October —and has been mopping up the liquidity. But as the growth in the net foreign exchange assets of the banking sector and the spurt in deposits indicate, not all the liquidity has been mopped up.

The slowdown in industrial growth is also seen from another indicator: the rise in the wholesale price index for manufactured products is now 4.2%, versus around 6% in April. Inflation threats stem from elevated fuel and food prices, with the latter being addressed through imports and a good monsoon. And the irrational exuberance in real estate prices can be addressed by raising capital adequacy or margin requirements for loans in that sector. But high oil prices continue to be an issue.

It’s unlikely RBI will cut rates and the debt market believes a hike in CRR (or the balance banks need to maintain with the central bank) is inevitable, if the pace of current inflows continues. But if RBI does nothing, the liquidity will ensure a slow downward drift in interest rates, which will revive the lagging consumer sector.

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