8% growth: still within reach?

8% growth: still within reach?

New Delhi: A slump in industrial output to the slowest pace of growth in 10 years will increase pressure on the Reserve Bank of India (RBI) to cut borrowing costs and may impede the country’s ability to achieve the target of 8% economic expansion this fiscal year.

Industrial output grew 1.3% in August, government data showed on Friday, slowing from 10.9% in the same month last year. In July 2008, industrial output had grown 7.4%.

Also seeDeclining fortunes (graphic)

Industry accounts for 26.63% of the country’s gross domestic product (GDP), a measure of the nation’s total output of goods and services.

Finance minister P. Chidambaram and some economists said the August performance overstated the slowdown and questioned the reliability of the data.

“The IIP (Index of Industrial Production) numbers are not very satisfactory and at the same time they are not very reliable," Chidambaram said. “I have conveyed my concerns a couple of months ago to the ministry of industry, I have conveyed them today. "

Data released by the Central Statistical Organisation (CSO) showed that in the first five months of fiscal 2008-09, industrial output grew 4.9% against 10% during the same period last year. Manufacturing, which accounts for almost 80% of industrial production, slowed to a growth rate of 1.1% in August from 10.7% a year ago. “I think the IIP number has to be taken as just one input," Chidambaram said. “We should look at many other numbers—exports, imports, FDI (foreign direct investment) and capacity to raise ECB (external commercial borrowings)."

Credit rating agency Crisil’s principal economist Dharmakirti Joshi also said he doubts the reliability of the data.

“The IIP data is quite surprising and does not reflect the ground reality," Joshi said. “There are measurement issues with the data captured. It overstates depression in the economy. Growth is trending down, but not to this extent. I am sure growth in industrial production will bounce back..."

The capital goods sector grew 2.3% in August, compared with 30.8% a year ago, indicating slower demand for investment goods. More worrying, production of intermediate goods—inputs used in the production of other goods—declined by 6.2% in August, compared with a 13.8% growth in the corresponding month last year.

A senior government official associated with the data collection, who did not wish to be identified, said the sharp slowdown in capital goods should not be a cause for worry, given the “lumpiness" of output— since it is primarily dependent on orders and tends to bunch up. In the case of intermediates, such as steel, however, the official said it reflected capacity constraints in the economy. “However, since most of the intermediates can be imported, domestic manufacture will not be necessarily impacted," he added.

The Confederation of Indian Industry (CII), an industry lobby group, said, “Capital goods sector is suffering owing to the fact that credit has dried up for investment projects, including construction, and this has impacted orders for capital goods."

Production of consumer durables, such as automobiles and air conditioners, was up 5.6% in August compared with a decline of 2.3% a year ago. Data released by the Society of Indian Automobile Manufacturers earlier showed that car sales declined by 4.36% in August, although motorcycle sales grew by 15.9%.

Domestic passenger car sales in August stood at 94,584 units, against 98,893 units in the same month last year. Motorcycle sales increased to 485,000 units from 418,000 units in the corresponding month a year ago.

Goldman Sachs Asia Economic Research vice-president Tushar Poddar said the slump in industrial production was due to the volatile nature of the index.

“Although growth is slowing, it is important to put the industrial production number into context," Poddar said. “Other macro indicators such as direct taxes, money supply, non-oil imports and credit growth have all been robust in the April-August period... We expect activity to continue to weaken and (hit a) trough in the first half of FY10, before starting to pick up."

The probability of a rate cut by RBI at its 24 October meeting has increased because of the slowdown and the crisis in the global financial markets, he added.

CII also demanded a rate cut by the central bank, which has raised its key interest rate by 125 basis points this fiscal year to combat inflation. One basis point is one-hundredth of a percentage point.

“A hawkish stance is no longer appropriate in the current situation where growth is clearly being sacrificed," the CII statement said. “Inflation is likely to decline to single digit in a few months as global commodity prices have started softening. Central banks across the world have started cutting interest rates in view of the crisis in global financial markets. This would provide an opportunity for RBI to change its stance and start cutting interest rates."

PTI contributed to this story.