Industrial production contracted 3.5 per cent in March, dragging the cumulative factory output growth last financial year closer to the level of the financial crisis period of 2008-09. This indicates economic expansion has slowed down and it may not be possible for India to achieve GDP growth of 6.9 per cent during 2011-12 as calculated in the advance estimates.
However, the Reserve Bank of India (RBI) is of the view the growth slowdown would bottom out and has stuck to its projection of 7.5 per cent growth for this fiscal. The Budget assumption was of 7.6 per cent.
Industrial growth entered the negative zone for the second time last fiscal — the first was in October at -4.9 per cent. That took the 2011-12 factory output growth to 2.8 per cent, just above the 2.5 per cent witnessed in 2008-09 when US financial services icon Lehman Brothers collapsed.
None of the broad sectors performed well — be it the dominant manufacturing (-4.4 per cent), mining (-1.3 per cent) or electricity (2.7 per cent), official data released on Friday showed.
The most dismal picture was presented by capital goods output, which contracted more than 21 per cent. Intermediate goods (-2.1 per cent), consumer durables (0.2 per cent), consumer non-durables (one per cent) and basic goods (1.1 per cent) did not perform well either.
All the three major segments of the Index of Industrial Production (IIP) slowed and only 10 sectors of 22 showed positive growth in manufacturing in March vis-à-vis 18 of 22 in February. Slight indications of the coming IIP numbers were evident in the contraction of exports and just two per cent growth in the eight core industries, comprising over one-third of the IIP, in March.
Finance Minister Pranab Mukherjee blamed global demand and investment activity for the IIP contraction in March.
“The IIP figures are disappointing... Continued weak global business sentiments are also adversely impacting the recovery of domestic private investment. The domestic investment recovery remains frail,” he said.
While industry chambers asked for a further cut in policy rates by the RBI, Prime Minister’s Economic Advisory Council Chairman C Rangarajan said the central bank might be in a dilemma if non-food, manufactured product inflation rose again.
Mukherjee said it would take some time for the RBI’s last policy rate cut to translate into lower interest rates. “The RBI’s monetary stance has been reversed in the last policy announcement. It will take some more time for interest costs to come down.”
He said part of the dip in the March IIP numbers was due to a high base effect. In fact, the IIP reading was the highest in terms of points at 186.4 in March in the entire 2011-12. However, in the same month the previous fiscal, it was much higher at 193.1 points. Similarly, all sectors — manufacturing, electricity and mining — showed the highest index reading in March in the whole of 2011-12. This was the case even in the capital goods industry, which was the main culprit in pulling down IIP growth. But, the base effect cannot account for the entire contraction in factory output. RBI Deputy Governor Subir Gokarn said in Bangalore the data reinforced the slowdown trend in the country. “The moderating inflation was a result of the growth slowdown,” he said.
CII Director General Chandrajit Banerjee said the data raised concerns that the economy might be showing early signs of a vicious cycle of de-growth.
|“Continued weak global business sentiments are adversely impacting the recovery of domestic private investment”
|“The data reinforce the slowdown trend in the country. The moderating inflation was a result of the growth slowdown”
Dy Governor, RBI
|“I don’t think the solution is stimulus... there are a lot of things to do with project implementation”
MONTEK SINGH AHLUWALIA
Deputy Chairman, Planning Commission
“IIP numbers are disappointing... I don't think the solution is stimulus. In my view, there are a lot of these things to do with project implementation. That is not the result of stimulus,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said.
In fact, the chambers also did not ask for stimulus. “It is high time the government fast-tracked the implementation of major projects, which would increase the overall confidence and also stimulate growth in the industrial sector,” said Ficci President R V Kanoria.