Focus on RBI as growth slumps

Focus on RBI as growth slumps

New Delhi: Growth of factory output plunged to an 18-month low of 2.7% in November, triggering concerns about a phase of slower industrial activity and resurgent inflation.

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Even as analysts were surprised at the extent of the slowdown, the growth numbers have served a poser to the Reserve Bank of India (RBI) ahead of its key monetary policy meeting on 25 January: Will RBI keep its eye on the poor industrial growth numbers or on containing growing inflationary pressures in the economy?

While growth was expected to slow down in the post-Diwali month especially because of a high base last year, the data surprised analysts and policymakers on the lower side.

Finance minister Pranab Mukherjee said the deceleration in the Index of Industrial Production (IIP) and high inflation could adversely impact the economy, and promised to take corrective steps to push up factory output.

“If IIP goes down and inflation goes up, it will have an adverse impact, but I am not coming to any premature conclusion," Mukherjee said. “We shall have to look into and take corrective measures so that IIP numbers revive in the remaining four months."

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However, analysts expect, in light of the higher base last year, industrial growth to remain subdued for rest of the fiscal. IIP averaged 16.4% in December-March in the 2009-10 fiscal.

“If IIP growth remains within the 4-7% range during the fourth quarter of the fiscal, that will still be good enough to indicate that industrial recovery has not stalled," said Samiran Chakraborty, head of research at Standard Chartered Bank.

Citigroup India economists Rohini Malkani and Anushka Shah, in a research note, said they expect IIP to be in low single digits next month. “While predicting this data is admittedly getting more and more difficult, given the high base effect, we expect the numbers to remain in the low single-digit range, especially next month, as December 2009 IIP touched an all-time high of 18%," they said.

Cumulatively, for the period April-November 2010, IIP has grown at 9.5% compared with 11.2% during the same period last year.

In November, growth in manufacturing dipped to 2.3% compared with 12.3% a year ago. Growth in mining slowed to 6% compared with 10.7%, while electricity production rose by 4.6% against 1.8% a year ago.

Significantly, capital goods maintained a double-digit growth of 12.6%, though growth in basic goods and intermediate goods moderated to 4.5% and 2.4%, respectively.

However, growth in the consumer goods segment contracted by 3.1%, the first time in the current fiscal.

Analysts also pointed out that the volatility of data raises questions on its reliability.

In the September mid-quarter review, RBI said that the high volatility of IIP “raises some doubts about how effectively the index reflects the underlying momentum in the industrial sector".

Economists Taimur Baig and Kaushik Das of Deutsche Bank wrote in a research note that IIP data has been extremely volatile in 2010, with the standard deviation about 50% higher than what was seen during 2005-09. “Given the noise in the data, we don’t expect India’s policymakers to pay much attention to today’s data out-turn. Credit growth, retail sales and trade data suggest that the economic momentum is fairly robust," they said.

Chief statistician of India T.C.A. Anant, however, rejected the proposition that IIP had become more volatile this fiscal. “There is no structural break in the volatility of IIP this year. Volatility of industrial production data has been high since last five-six years, when India entered the high-growth phase," Anant said.

Principal adviser to the Planning Commission Pronab Sen concurred with Anant, while admitting that data this year has been more volatile, mostly due to an erratic base year in 2009-10.

Anant said that the work for releasing a new IIP series, with 2004-05 as the base year, is yet to be completed. “We are working with the line ministries and I expect the complete set of answers from them soon," he added.

Rajeev Malik, senior economist at CLSA Singapore, said in a research note that while there was already a moderation in economic activity, the industrial production data overstated that deceleration. “Note that industrial production growth has been moderating since the start of 2010. The Purchasing Managers’ Index (PMI) survey and December exports have a better tone," he added.

India’s exports for December registered a growth of 36.4%, the highest in 33 months. The HSBC Manufacturing PMI for India for December was at 57.7, slightly lower than November’s 58.4.

Malik said the latest data would not affect his expectation of a 25 basis points interest rate increase on 25 January. “But the ongoing moderation in industrial activity will make RBI more cautious about aggressive tightening despite inflation-related concerns," he said.

Annual wholesale price inflation rose 7.48% in November and is expected to accelerate in December, for which data is due on Friday.

PTI contributed to this story.