The Hindu Business Line : IIP numbers: Explaining the blip

A mere aberration or a warning sign of a sharp deceleration in India Inc’s growth? That is the question at the top of most investors’ minds regarding the recently released January IIP numbers. At this juncture, both sides can be argued with equal evidence.

Optimists can take heart from the flawed composition of the IIP (segments such as cotton textiles, sugar and wheat — heavy weights in the IIP — aren’t the leading lights of India Inc) and erratic trends in its constituents from month to month (for instance, monthly growth in ‘metal products’ has swung from a negative 23 per cent to a positive 48 per cent over a year).

A single month’s index numbers can also be distorted by the base effect and various cyclical/seasonal factors that often prompt companies to stretch or crunch their production schedules. Here, it needs to be mentioned that the ‘capital goods’ segment of the IIP, which has been the key cause of worry this month, has still clocked a healthy 18.3 per cent growth in the April ‘07-January ‘08 period, despite a high base. This is the same as the growth recorded in this period last year.

While the steep decline in the ‘capital goods’ index may be one-off, trends in IIP numbers over a few months do suggest that a slowdown is indeed underway. Growth in the index, which peaked in August, has been in single digits — in four out of the past six months.

There are also signs that the industrial slowdown is broad-based, with segments such as basic goods and capital goods, believed to be on a structural ‘high’, now witnessing a deceleration. Cues from macro indicators such as commercial vehicle sales, excise duty collections and cement dispatches in recent months also point to slowing growth.

Market experts also admit that a slowdown is indeed on for India Inc. Higher interest rates, which have led to funding constraints on projects, capacity constraints in select sectors and a slowdown in government order flow due to policy delays are some of the reasons attributed.

Mr A. Balasubramanian, CIO of Birla Sun Life AMC, for instance, attributes the slowdown to delayed order flows. “We have seen a delay in the take-off of some projects. The delays may be due to funding issues, financial closure or other procedural aspects. The problem is not about availability of funds; companies are able to raise as much as they want. It is more about getting funds at rates that the companies are comfortable with.”

He points out that orders flows may pick up from now on as regulations are in areas such as allocation of coal blocks and awarding of ultra mega power projects.

“The sharp drop in the industrial production numbers looks to be an aberration. However, there is a real slowdown in growth as a result of the tight monetary policy. If high interest rates persist, then we are likely to see a lower trend growth of 7 to 8 per cent going forward”, says Mr Sandip Sabharwal, CIO Equity, JM Financial Asset Management.

With evidence on both sides, to wait and watch appears to be the best course of action at this point in time.

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