At 3%, IIP runs out of steam

The sharp drop in industrial production in March to a six-year low of 3% may have triggered fears of a
slowdown, but economists are still holding on to an 8%-plus growth projection for 2008-09. The
optimism among policymakers and economists, however, is not shared by industry players, who believe
that high interest rates and rising input costs have started impacting demand.
The high inflation, however, rules out any possibility of rate cuts to stimulate growth. The industrial
production, as measured by the Index of Industrial Production (IIP), grew at a disappointing 3% in
March 2008 compared to a robust 14.4% growth in March 2007. As a result, the industrial production
growth slipped to 8.1% in 2007-08 from 11.6% in 2006-07.
The industrial growth for March 2008 is the lowest since February 2002. But the government has very
little leverage to boost growth. In view of high inflation as well as inflationary expectations looming
over the economy due to spiralling crude oil and commodity prices along with depreciating currency,
maintaining price stability will be a difficult task for a central bank. Thus, expecting any kind of rate cut
is completely out of question.
The industrial slowdown is largely because of the sharp drop in manufacturing, which has a high weight
in the IIP. Manufacturing grew 2.9% in March 2008 against a 16% increase in March 2007. Even
electricity (3.7%) and mining (3.8%) grew below their trend rate.
There is a silver lining, though: Part of the drop appears to be because of the base effect — industrial
growth in March 2007, the base for calculating growth in March 2008, was unusually high. There is
certainly a base effect and average industrial growth has slowed down in the current year from about
10%-10.5% in the previous year. If you look at the numbers month-on-month (M-o-M) and look at
March over February, you will find a 23-point increase in the general index, which will translate to a
growth of nearly 8.5%. Basically, in March 2007, growth had been 37 points over a base of 250, so that
was a huge increase. We are really seeing the base effect and there is really no slowing down if you look
at it over the trend on an M-o-M basis.
The higher sequential growth (March over February), which had turned negative in February 2008, does
underscore the point. The industrial production index went up by 23 basis points in March 2008 over
February 2008, after registering a fall of 8 basis points in February over January.
But there are others who are not buying the high base effect explanation. The industrial growth is indeed
slowing down, they argue, thanks to higher interest rates and the rising cost of inputs hitting margins and
ability to invest.
There is no doubt that higher base effect is the main reason. However, in view of the rising cost of
production and slackening consumer demand, it cannot be denied that companies are cutting down on
production and investments. It’s not only a languishing consumer durables sector, but also the
manufacturing sector which grew at a mere 2.9% in March, dragging IIP down. It is a cause of concern.
The growth in capital goods sector is showing signs of fatigue. It has slipped to 8.6% from 18.1% in the
corresponding period last year.
The consumer durables sector continues to worry. It turned in a negative growth of 2.1% in March 2008
as compared to a 3.8% surge in the same month last year. In fact, between April 2007 and March 2008,
the average growth in the sector was only (-)1%. This is largely due to the decline in two-wheeler sales.
The growth slowdown witnessed by the motorcycle industry is largely due to lack of enough retail
finance options. Even the excise cut has not helped. Unless the retail finance situation improves, the
motorcycle industry will see little impact of the excise duty cut.
The lower March number came in the backdrop of the central bank’s annual monetary policy announced
on April 29, where it forecast higher industrial growth in coming months and maintained its GDP
growth target at 8%-8.5%, much higher than experts’ forecast of 7.5%-8%.
With crude prices touching new highs and the country’s inflation continuing to rise — it touched a
three-and-a-half-month high of 7.61% for the week-ended April 26 — the central bank may not be in a
hurry to cut rates.
Index for Industrial Production
(%) (%)
31.03.07 31.03.07
construction 16.00 2.90
Mining 8.00 3.80
Electricity 7.90 3.70
Consumer Durables 8.80 2.10
Capital Goods 18.10 8.60
Intermediary items 15.30 3.50
Growth in Ind production 11.60 8.10
Industrial Production 14.80 3.00

construction
20.00
18.00 Mining
16.00
14.00 Electricity
12.00
10.00 Consumer Durables
8.00
6.00 Capital Goods
4.00
2.00 Intermediary items
0.00
31.03.07 31.03.07 Growth in Ind
production
(%) (%)
Industrial Production