A fading growth spurt

A fading growth spurt

Industrial output data for August is out and while the Index of Industrial Production (IIP) rose by 5.6%, it showed a perceptible slowdown compared with the double-digit growth seen for many months.

In sectoral terms, the slowdown is especially sharp in manufacturing, where output came crashing to 5.9% over the same period last year. Within manufacturing, machinery and equipment (which have a weight of 9.6 in IIP) grew by only 0.4% year-on-year (y-o-y) in August. The figure for the same month last year was 15.2%. Electricity production, too, slowed markedly to just 1% y-o-y. This is a harbinger of further reduction in output in the months to come. The one bright spot was mining, which showed 7% growth. But even that was slow compared with August 2009 when the sector grew by 11%. The slowdown is generalized, whether one sees it from a use-based perspective, or in sectoral terms.

The question now is: Has growth petered out? And what does this mean for the Indian economy?

Much of the increase in industrial output, which witnessed double-digit growth from August last year to May this year (barring September 2009 when it came down slightly to 9.3%), came after the Union government began pumping huge amounts of money in late 2008 and in 2009 to stimulate the economy. At the same time, there was tremendous monetary loosening by the Reserve Bank of India. As money became cheap and uncertainty in the markets wore off, industrial output picked up. With continuing inflation and concerns over fiscal slippages, these spigots have been closed.

Statistically, IIP showed an upswing because of the low base from which output picked up. For example, in March 2009, the month when output bottomed out, industrial output grew by just 0.3% y-o-y. That magic is now over.

Perhaps it is unfair to say that growth in manufacturing all these months was due only to these factors when demand continues to be robust. But what needs emphasis is that with continuing uncertainty in the global economic environment, industrial growth, while not tapering off, will not show the spectacular rise as it has in the recent past.

While there are reasons for concern, when seen in the light of other data, such as loan growth, non-oil imports and growth in sectors such as automobiles, as reflected in the continuing rise in transport equipment sub-index, there are grounds for some optimism.

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