Another month, another dismal industrial production number. A slowing down to 1.9 percent of production will probably come as no surprise to anyone who has been observing the growth patterns overtime.
Why? It is a combination of domestic and international factors. Three, to be precise.
#1. Rising interest rates – Industrial production responds to cost of capital, which has been rising incessantly in India over the past months. Plagued by the sceptre of rising inflation, the RBI has been doing its bit in increasing policy rates. Commercial banks have duly followed, increasing lending rates in the economy. As a result, manufacturing production, which accounts for majority of the Index of Industrial Production (IIP) has come tumbling down as a lagged response to interest rate tightening. For the month of September, manufacturing has grown by a poor 2.1 percent (in comparison with a comparatively robust 6.9 percent in September 2010). Even comparing with the previous quarter (Q1 2011-12), the performance this quarter has been very below average at 2.9 percent from 7.7 percent.
#2. Rising inflation – Inflation in India has remained quite high, suggesting the limited role that monetary policy can play in reducing inflation at the present point in time. Not only does rising inflation hit the costs of companies, via increases in price of inputs, it also limits the pass on of prices to consumers who are already spending less on discretionary products. Rising prices of essential commodities like food and fuel means that consumers have less to spend on other goods. As a result, consumer non-durable goods’ production has actually shrunk by 1.3 percent in September. Though, in this case it needs to be noted that there is no difference in the April-September 2010 and 2011 growth rate (3.8 percent), indicative of consumer response to inflation. While consumer durables have shown robust performance in September (8.7 percent), and is one category showing improved performance over the quarter, a seasonal (read, festive) trend is possibly at play.
#3. Uncertain global environment – The latest trade press release shows the now widely expected decline in exports growth to just about double digits. No points for guessing then, which industries will be impacted most. Capital goods, which is becoming one of India’s significant exports, has shrunk this month by almost 7 percent. This trend is also visible in other export oriented sectors such as textiles and apparel.
Given each of the segments’ linkages with others, it is only expected that the entire IIP basket has softened. With the situation not looking particularly different in November, it is likely that a decline in IIP will continue to get worse before it gets better