The Hindu Business Line : MacroTracker

If you are a believer in the Cockroach Theory (‘One bit of bad news means there is more to follow’), then the recently released Index of Industrial Production (IIP) numbers for January should ring warning bells. The widely-tracked IIP has grown by a sedate 5.3 per cent in January 2008, taking a plunge from 11.6 per cent last January. This month’s low IIP raises serious questions on whether India can close this fiscal with a 9-10 per cent growth in production. Though the January number was alarmingly low, the pattern in the IIP since early this financial year can, at best, be described as erratic. Six of the nine months this fiscal have seen growth of below 9 per cent in this index, and the waning momentum since November points to an industrial slowdown.

Performance of Index constituents

The mining and electricity segments have shown fluctuating trends, though the cumulative growth for April ‘07- January ‘08 more or less matches that for the same period last year. But manufacturing presents quite a different picture, decelerating to 9.2 per cent in the 10 months ended January 2008 (12.1 per cent last year). A break-down of the January numbers shows that high inflation and consequent tightening of liquidity may have taken the wind out of such rate-sensitive sectors as transport equipment and consumer durables.

For the April ’07-Jan ‘08 period, transport equipment and parts grew a mere 2.9 per cent, over a 15.5 per cent growth recorded in April ‘06- Jan ‘07. Consumer durables have shrunk 1.7 per cent in comparison with a growth of 10.9 per cent the previous year. Both appear linked to interest rates. The more disturbing facet of the January numbers lies in the slow growth in the capital goods segment, which edged up just 2.1 per cent after growing at a scorching pace since April.

Do the January IIP numbers signal that the slowdown in consumption-led sectors such as automobiles and consumer durables is now infecting investments as well? It may be premature to conclude this based on one month’s numbers.

What to expect

While the Budget has tried to stimulate consumption by increasing tax exemption limits and cutting excise duties, the RBI is still faced with the balancing act between containing inflation and freeing up money for growth. Though the IIP figures for the next two months may not be any different, the numbers beginning April might begin to capture the Budget largesse. And any rate cut in the Monetary Policy at that time will only add icing to the cake.

C. PARVATHA VARDHINI

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