Industrial output growth slows to 6.4% in Sep, gives Sensex a jolt

Industrial output growth slows to 6.4% in Sep, gives Sensex a jolt

New Delhi: Industrial production in September grew by 6.4%, the slowest in almost a year, even as capital goods output slowed to an 18.6% growth after a scorching 30% in August.

Economists pointed out that cheaper imports for the sector, buoyed by the rising rupee, had probably helped capital goods production.

Over a six-month period, the index of industrial production (IIP) showed a respectable growth of 9.2%, data released by the ministry of statistics showed.

“The appreciating rupee and a hardening of interest rates suggests that there is a need to revive consumption of consumer durables to restore industrial growth back to double digits," the finance ministry said in a background note for an economic editors’ conference here.

While manufacturing grew by 9.7% in the first half, it was likely buoyed by capital goods, which showed an unexpected surge of 19.6% in these six months, compared with the 17.5% growth in April-September 2006.

“There is little evidence of investment dampening yet," said Dharmakirti Joshi, principal economist, Crisil Ltd, a ratings firm. “Strong performance of capital goods backs up the investment story. Also, the appreciating rupee has supported import of capital goods and fed into the investment upturn," he added.

The low production numbers in September, along with falling Asian stock markets, initially spooked the stock market, triggering a fall of more than 500 points in the Sensex, the Bombay Stock Exchange’s 30-share index, in the morning session. It later recovered to post a 170.33 loss at the end of Monday trading.

Saumitra Chaudhuri, economic adviser for rating agency Icra Ltd, said: “If you look at the two-digit classification (which gives individualmanufacturing industries), nothing looks very good. Although the industrial boom is by no means dead, the September slip is really sharp and unexpected."

Taking out wood and wood products, which has been growing around 78%because of very low growth in the previous two years, industrial growth would probably be even less than 6%, Chaudhuri added.

Analysts said manufacturing industries, which grew by only 6.6% compared with 12.7% a year ago, had been badly hit by record high interest rates. Sectors sensitive to retail credit cost such as automobiles, motorcycles and white goods had been particularly affected.

Consumer durables output, for instance, dipped by 7.6% in September, and by 3.2% in the first half of the year.

Consumer goods industry, however, has questioned the IIP data, saying that actual production has been higher.

Robert Prior-Wandesforde, economist with HSBC, said: “The silver lining is that the production of capital goods continues to soar... pointing to on-going strong investment spending. Assuming this spending is going to the right areas, this is exactly what the country needs to remove the bottlenecks so evident in surveys of capacity utilization."

A CII-Ascon survey said 17 of the 91 manufacturing sectors tracked by it showed adip in production, while another 37 grew at single-digit rates, mainly due to costlier credit and the rupee’s rise against the dollar.

In a statement, another industry association, Ficci, asked for fresh policies to boost “manufacturing sector including downward revision of interest rates".

The Reserve Bank of India (RBI) has, however, indicated it is against a cut in interest rates, in the backdrop of record foreign capital inflows which have caused broad money supply to increase by 22.5% as on 26 October, the highest in a decade, weekly data released by RBI on 8 November said.

In its half-yearly monetary policy review on 23 October, RBI also said it expected a “marginal moderation in industrial activity" as credit growth slowed to 23% on 12 October, from 29% a year ago. But this was before the September numbers came, said Chaudhuri.

He believes that “the fall in growth of machinery and equipment production to 4.4% in September could be something to worry about."

Prior-Wandesforde also said that “the three-month moving average of the year-on-year growth rate indicates that output growth fell to 8.2%, compared with a high of 13.6% at the beginning of the year. This doesn’t bode that well for third quarter GDP."

The finance ministry as well as RBI are expecting an 8.5% growth rate for 2007-08.

Joshi, however, believes that “industry will pick up from the September lows, though overall industrial growth will be lower than last year."