The interesting thing about the Index of Industrial Production (IIP) numbers for May is not so much that the rate of growth has tapered off, or that it is lower than expectations, but that the index is actually at a lower level than in the previous month.

Contrast last year’s numbers, which show that the IIP increased by 4% month-on-month. According to Citigroup analysts Rohini Malkani and Anushka Shah, IIP growth was down 2.7% on a seasonally adjusted month-on-month basis in May, against positive growth of 2.6% month-on-month in April. That points to slowing growth in industry, especially in manufacturing.

Graphic: Naveen Kumar Saini/Mint

OECD leading indicator for India has fallen from a peak of 101.8 in February to 101.3 in May. The robust services PMI numbers, however, paint a different picture, as does the International Monetary Fund’s recent forecast of 9.4% growth in the gross domestic product this calendar year.

The indices for capital goods, consumer durables and consumer non-durables were all lower in May than in April. While the capital goods index has been volatile, the weakness in the consumer non-durables index is very clear.

Growth in the first two months of this fiscal has been a low 3.5% coming on top of a -8% fall in the year-ago period. That suggests continuing stress in rural demand despite a good winter crop, the result of a structural gap between higher demand for food and the inability to meet that demand. It’s also likely, as Kotak Mahindra Bank economist Indranil Pan points out, that inflation has eroded purchasing power.

The explanation for slower manufacturing growth could be that capacity constraints may be capping growth, as HSBC co-head of Asian economic research Frederic Neumann says.

In that case, the slowing growth is not an indication of lower demand, and there should accordingly be no change in the Reserve Bank of India’s assessment of the economic situation. In fact, the combination of high demand and capacity constraints is a recipe for higher prices.