Industrial output plunges to 21-month low

Industrial growth plunged to a 21-month low of 3.3 per cent in July. The number is significant, as it comes ahead of the Reserve Bank of India's monetary policy review meeting on Friday that is expected to take a call on interest rates — whether to raise them further or press the pause button.

The 3.3 per cent year-on-year increase in the official Index of Industrial Production (IIP) — the lowest since the 2.3 per cent of October 2009 — has come mainly from capital goods, the output of which dipped 15.2 per cent. This manufacturing sub-segment has, in fact, been showing huge volatility, having grown by 38.2 per cent in June.

But apart from capital goods — a proxy for investment activity in the economy — even intermediate goods registered a negative growth rate of minus 1.1 per cent in July.

Broader slowdown?

Taken together, they might be indicative of a broader slowdown trend, which could weigh on the central bank's mind as it decides whether the risks on this count outweigh worries over persistent inflation. Till recently, the balance was strongly tilted towards the latter.

“The RBI will be concerned with growth prospects, but the major concern will be to tame inflation, which remains very, very high,” the Chairman of the Prime Minister's Economic Advisory Council, Dr C. Rangarajan, was quoted as saying.

All eyes are now on the wholesale price index-based inflation data for August, scheduled to be released on Wednesday. It remains to be seen if that rate — expected to touch double digits — would carry more weight than the latest IIP growth figures. “Inflation is going to be very close to 10 per cent (for August). We are expecting inflation to remain very difficult till November and maybe December, and then begin to slow down,” said Prof Kaushik Basu, Chief Economic Adviser to the Finance Ministry.

Among the major IIP segments, the Index for Manufacturing rose by a paltry 2.3 per cent in July, while amounting to 2.8 per cent for mining and 13.1 per cent for electricity. During the same month of last year, the year-on-year growth rates were 9.9 per cent for the general IIP, 10.8 per cent for manufacturing, 8.7 per cent for mining and 3.7 per cent for electricity.

The cumulative industrial growth during the first four months of this fiscal worked out to just 5.8 per cent (compared with 9.7 per cent for April-July 2010-11), with these at six per cent (10.5 per cent) for manufacturing, 1.1 per cent (8.2 per cent) for mining, and 9.4 per cent (five per cent) for electricity.

Within manufacturing (besides capital goods and intermediate goods), the basic goods sub-segment grew by 10.1 per cent (against 4.4 per cent in July 2010), with consumer durables (8.6 per cent versus 14.8 per cent) and non-durables (4.1 per cent versus minus 0.9 per cent) also doing relatively well.

For the April-July period, capital goods production stood higher by 7.6 per cent year-on-year (against 23.1 per cent in these four months of 2010-11), with the corresponding growth rates at 4.2 per cent (18.4 per cent) for consumer durables, 4.9 per cent (3.8 per cent) for non-durables, 7.9 per cent (5.2 per cent) for basic goods and 0.8 per cent (10.1 per cent) for intermediate goods.

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