Economists sombre on industrial growth

September’s decline in industrial growth to a two-year low of 1.9 per cent has already dampened sentiment. Now, economists say it may take between four to 11 months for industrial production to improve and do not even rule out factory output contracting in the months to come.

If that happens, the signs are not good for economic growth, as industry is 18-19 per cent of India's gross domestic product. The Indian economy grew at a six-quarter low of 7.7 per cent in the first three months of this financial year.

Also, contraction of mining output will pose a danger to the robust electricity number that was the only silver lining in the Index of Industrial Production (IIP) among the broad categories. Electricity output rose by nine per cent in September.

Mining contracted for the second month in a row in September, by 5.6 per cent year-on-year. This was the third month when mining output declined out of six months in this financial year.

Economists also say the contraction in mining output will jack up input prices of manufactured products. However, they are divided on whether these could be passed on to consumers at this stage of slackening demand.

“If the trend continues, with electricity no longer supporting industrial production, the IIP will start contracting,” said Anis Chakravarty, director, Deloitte, Haskins & Sells.

As the effect of mining on electricity generation comes with a lag effect of three to four months, the electricity numbers will also start slowing, cautioned Arun Singh, senior economist with Dun & Bradstreet.

D K Joshi, chief economist, Crisil, said a contraction in IIP didn’t seem very likely, but if global problems persisted, it may push industrial growth to the negative zone.

Contraction in industrial production is rare in India. In recent times, it occurred during the time of the global financial crisis, in the later months of 2008. Singh said, “In case the mining problem is not resolved soon, the IIP may stagnate or become negative, but that is in an extreme case.”

He expected industrial growth numbers to start heading up from August 2012 only, when the Reserve Bank of India is likely to begin cutting rates. RBI's tight monetary stance is being blamed for stifling growth numbers, while not impacting inflation much.

Chakravarty said the numbers would start reviving only in the fourth quarter of this financial year or the first quarter in the next one. Joshi said the slow numbers would persist for another four to six months.

Madan Sabnavis, chief economist, CARE Ratings, said IIP growth for this year would definitely be at sub-five per cent. Industrial growth was five per cent in the first six months of 2011-12.

Mining output has been contracting due to late withdrawal of the monsoon and strikes in Coal India Ltd. Coal, th major input for electricity production, saw output decline by 17 per cent for September.

Singh felt the contraction in mining would lead to increase in the cost of inputs, putting upward pressure on inflation.

Joshi said rising input costs would eat into the margins of companies and not necessarily lead to inflation. “Demand-side pressure is down, so manufacturers will not be able to pass on the increased input costs to the users,” he said.