Industrial growth plunges to two-year low of 3.3% in July
Sep 12 2011 , New Delhi
Tags: News
Data resurrect fears of broader slowdown amid rate hike fears
Industrial growth plummeted to 3.3 per cent in July, the lowest in two years, as manufacturing, especially the machine-building industry, took a major hit.
With this, industrial gro-wth during April-July 2011-12 has fallen to 5.8 per cent from 9.7 per cent a year ago and manufacturing growth declined to 6 per cent from 10.5 per cent. This accentuated the fears of an economic slowdown with consequent tardy expansion of jobs and incomes.
Even though Indian industry had anticipated this as was evident from the findings of the surveys by two chambers of commerce, CII and Ficci, on Sunday, the official index of industrial production data on Monday came as a shock and sent markets tumbling.
The reliability of IIP data has been questioned by many, including the Reserve Bank of India. But there was a near-consensus among analysts that industrial performance in April-July 2011-12 further dampens the near-term prospects for industrial growth as well as the GDP growth outlook.
The data resurrected fears of a slowdown. The worst aspect of the data is that the slowdown is more pronounced in investment goods (plants & machinery) than in consumer goods.
The Ficci manufacturing survey on Sunday emphasised the impact of sluggish growth on jobs. Economists and officials still anticipated RBI to raise interest rates further in the Friday’s money policy review as inflation remains elevated
“It’s very disappointing”, said department of economic affairs secretary R Gopalan. “It indicated that the tightening of money policy by RBI has started biting.”
Chief economic adviser Kaushik Basu agreed with Gopalan and feared an industrial slowdown ahead. He said the GDP growth could also now fall to 8.1 per cent from 8.75-9.25 per cent projected in the Economic Survey this year.
The prime minister’s economic advisory council chairman, C Rangarajan, however, pointed out that inflation remained a major concern and, therefore, RBI would have to continue with its monetary tightening. He said there were conflicting signals — a dip in capital goods output in July by 15.2 per cent but a robust expansion in engineering goods exports.
He preferred to wait and watch, rather than immediately jump to a conclusion that an industrial slowdown had set in.
The entire manufacturing activity took a big hit, and its growth stood at 2.3 per cent in July 2011-12 as compared to 10.8 per cent last year. But it is the deceleration in capital goods production that spells big trouble. It implies a decline in building of new capacity and, therefore, could depress future factory output.
“IIP growth is expected to remain subdued in the coming two quarters. Nonetheless, RBI is expected to hike the interest rates by another 25 basis points as inflation still continues to inch higher,” said Dun & Bradstreet senior economist Arun Singh.
The industrial slowdown also does not auger well for exports, which have put up a stellar performance so far this year.
“RBI’s war on inflation through monetary tightening has resulted in a slide in demand across both investment and consumption aggregates,” Federation of India Export Organisations (Fieo) president Ramu S Deora said.
Ficci secretary general Rajiv Kumar echoed the sentiments: “The situation is indeed serious, as both manufacturing and mining sectors’ growth has dipped significantly and unless corrective policy actions are taken we may enter the negative territory soon.” Production growth in mining, manufacturing and electricity sectors in July 2011 stood at 2.8 per cent, 2.3 per cent and 13.1 per cent, respectively, over July 2010.
Capital goods and intermediate goods were poor performers. Within the capital goods segment, computers, textile machinery and commercial vehicles witnessed a growth of 47.1 per cent, 36 per cent and 21.8 per cent, respectively. But there were many laggards, including cable, rubber insulated (-64.9 per cent), cement machinery (-62.8 per cent) and UPS/ inverter/converter (-55.9 per cent). Basic goods, consumer durables and consumer non-durables showed growth of 10.1 per cent, 8.6 per cent and 4.1 per cent, respectively.
CII director general Chandrajit Banerjee said the IIP figures pointed to a disquieting trend. “The data vindicate our anticipation that the industrial sector will continue to show a weak performance. As revealed in the CII-ASCON survey for the first half of 2011-12, an increasing number of sectors are falling into lower growth categories.”
“There are clear signs of activity slowing down in the domestic economy on top of an increasing risk of a global recession staring in our face,” the chief economist of Religare Capital Market, Jai Shankar, said.
Given the gravity of the situation, the debate between inflation and growth is likely to assume centerstage. “Any increase in interest rates at this stage will directly impact capacity addition and job creation. Monetary tightening measures to combat the stubbornly high inflation could also have long-term ramifications,” said Assocham secretary general D S Rawat.
With this, industrial gro-wth during April-July 2011-12 has fallen to 5.8 per cent from 9.7 per cent a year ago and manufacturing growth declined to 6 per cent from 10.5 per cent. This accentuated the fears of an economic slowdown with consequent tardy expansion of jobs and incomes.
Even though Indian industry had anticipated this as was evident from the findings of the surveys by two chambers of commerce, CII and Ficci, on Sunday, the official index of industrial production data on Monday came as a shock and sent markets tumbling.
The reliability of IIP data has been questioned by many, including the Reserve Bank of India. But there was a near-consensus among analysts that industrial performance in April-July 2011-12 further dampens the near-term prospects for industrial growth as well as the GDP growth outlook.
The data resurrected fears of a slowdown. The worst aspect of the data is that the slowdown is more pronounced in investment goods (plants & machinery) than in consumer goods.
The Ficci manufacturing survey on Sunday emphasised the impact of sluggish growth on jobs. Economists and officials still anticipated RBI to raise interest rates further in the Friday’s money policy review as inflation remains elevated
“It’s very disappointing”, said department of economic affairs secretary R Gopalan. “It indicated that the tightening of money policy by RBI has started biting.”
Chief economic adviser Kaushik Basu agreed with Gopalan and feared an industrial slowdown ahead. He said the GDP growth could also now fall to 8.1 per cent from 8.75-9.25 per cent projected in the Economic Survey this year.
The prime minister’s economic advisory council chairman, C Rangarajan, however, pointed out that inflation remained a major concern and, therefore, RBI would have to continue with its monetary tightening. He said there were conflicting signals — a dip in capital goods output in July by 15.2 per cent but a robust expansion in engineering goods exports.
He preferred to wait and watch, rather than immediately jump to a conclusion that an industrial slowdown had set in.
The entire manufacturing activity took a big hit, and its growth stood at 2.3 per cent in July 2011-12 as compared to 10.8 per cent last year. But it is the deceleration in capital goods production that spells big trouble. It implies a decline in building of new capacity and, therefore, could depress future factory output.
“IIP growth is expected to remain subdued in the coming two quarters. Nonetheless, RBI is expected to hike the interest rates by another 25 basis points as inflation still continues to inch higher,” said Dun & Bradstreet senior economist Arun Singh.
The industrial slowdown also does not auger well for exports, which have put up a stellar performance so far this year.
“RBI’s war on inflation through monetary tightening has resulted in a slide in demand across both investment and consumption aggregates,” Federation of India Export Organisations (Fieo) president Ramu S Deora said.
Ficci secretary general Rajiv Kumar echoed the sentiments: “The situation is indeed serious, as both manufacturing and mining sectors’ growth has dipped significantly and unless corrective policy actions are taken we may enter the negative territory soon.” Production growth in mining, manufacturing and electricity sectors in July 2011 stood at 2.8 per cent, 2.3 per cent and 13.1 per cent, respectively, over July 2010.
Capital goods and intermediate goods were poor performers. Within the capital goods segment, computers, textile machinery and commercial vehicles witnessed a growth of 47.1 per cent, 36 per cent and 21.8 per cent, respectively. But there were many laggards, including cable, rubber insulated (-64.9 per cent), cement machinery (-62.8 per cent) and UPS/ inverter/converter (-55.9 per cent). Basic goods, consumer durables and consumer non-durables showed growth of 10.1 per cent, 8.6 per cent and 4.1 per cent, respectively.
CII director general Chandrajit Banerjee said the IIP figures pointed to a disquieting trend. “The data vindicate our anticipation that the industrial sector will continue to show a weak performance. As revealed in the CII-ASCON survey for the first half of 2011-12, an increasing number of sectors are falling into lower growth categories.”
“There are clear signs of activity slowing down in the domestic economy on top of an increasing risk of a global recession staring in our face,” the chief economist of Religare Capital Market, Jai Shankar, said.
Given the gravity of the situation, the debate between inflation and growth is likely to assume centerstage. “Any increase in interest rates at this stage will directly impact capacity addition and job creation. Monetary tightening measures to combat the stubbornly high inflation could also have long-term ramifications,” said Assocham secretary general D S Rawat.
The article was published in the Financial Chronicle
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