Slowdown in industrial production worsens

Slowdown in industrial production worsens

The slowdown in India’s industrial production worsened with growth dropping to 7.1% in July, as rising lending rates squeezed demand, particularly for consumer goods and vehicles, slowing output across all manufacturing sectors.

Some economists say that this trend could accelerate if a much anticipated global downturn does set in.

The Central Statistical Organisation (CSO), which releases the index of industrial production (IIP), also revised downwards the growth number in June, from the provisional 9.8% to 9%. As a result, production in the first four months of the current year averaged single digits, at 9.8%, compared to 11.1% in the same period in 2006-07.

“A slowdown in economic growth is building," said Shuchita Mehta, an economist at Standard Chartered Bank in Mumbai. “The short-term outlook does not make a strong case for a rate hike, but the central bank will ultimately resort to more tightening in the fiscal fourth quarter."

The data, however, triggered hopes that the Reserve Bank of India (RBI) would pare interest rates.

“With WPI (wholesale price index) inflation having eased comfortably below the Reserve Bank of India’s target of 5%, there is now plenty of scope for the RBI to cut rates if there is a sharp global economic downturn," said an advisory from investment bank Lehman Brothers.

Significantly, the slowdown has, for the first time, spread to the capital goods segment, too. After accelerated growth in the first quarter of the current fiscal year, annual growth in capital goods output slowed sharply to 12.9% in July. The sector grew 10.9% in April, 22.9% in May and 30% in June, returning an average rate of growth in the current year that is now close to 20%.

The dip in manufacturing was even sharper in July, as output dropped to 7.2% and the growth in June was revised as well to 9.9% from the provisional 10.6%.

Among manufacturing sectors, only two sectors—wood products and furniture, and non-cotton textile products—have shown healthy growth.

The sharpness of the deceleration caught most analysts by surprise. One poll by Bloomberg had forecast a 9.6% increase in industrial production. “The sharpness of the slowdown over the last couple of months looks a little erratic to us," says Robert Prior-Wandesforde, economist with HSBC.

Consumer durables, the sector most effected by a squeeze in retail credit, performed the worst. Output decelerated by 3.2% compared to 16.1% growth a year ago. The new data now reports a decline of 3.8% growth in this segment in June.

RBI has raised its policy rate, currently at 7.75%, seven times in the last three years.

Economists, however, were upbeat by the performance of the capital goods sector.

“This ties in with the other important indicators of the economy," said Dharmakirti Joshi, principal economist with domestic rating agency Crisil Ltd. “Whether it is the gross domestic product, the investment rate or even imports, which show that new investment and capacity expansions are still strong. Industry will bounce back from this low rate and, for the year, we might end up with an overall growth of 9%," he said.

Bloomberg contributed to this story.