Factory output growth at 7-month low of 6.3% in April

Bearing the brunt of high interest rates and rising input prices, industrial growth declined to its lowest in seven months at 6.3 per cent in April, a newly-structured index showed o Friday. Though manufacturing has less weightage in the new index, it was mainly responsible for the poor show.

The government also issued the data under the old series, with 1993-94 as the base year, which showed industrial growth fell to 4.4 per cent from 7.8 per cent in March. Barring March, the growth has been under five per cent since November 2010.

On the new Index of Industrial Production (IIP) series, with 2004-05 as the base year, manufacturing growth halved to 6.9 per cent from 14.4 per cent a year ago. Capital goods output, which indicates future of industrial growth, expanded by 14.5 per cent, compared to 35.5 per cent in the year-ago period. Growth in consumer goods output slumped to 2.9 per cent from 13.8 per cent, while intermediate goods output grew 3.4 per cent against 11.9 per cent.

Finance minister Pranab Mukherjee said the figures were disturbing. “We need to wait for longer term IIP growth to see the trend,” he told reporters here. However, the extent of slowdown is a bit magnified, since last year’s numbers looked higher because of a low base in 2009. In fact, manufacturing output had contracted to 3.6 per cent in April 2009.

“We continue to expect a moderation in headline IIP numbers in the first half of this financial year. The year is likely to be a year of two halves, with slower investment and easing consumption expected to weigh on headline IIP growth in the first half,” YES Bank’s chief economist, Shubhada Rao, said.

Rao expects a turnaround in the investment cycle in the latter half of the year, as inflation stabilises, the rate tightening cycle is completed and the government ushers in reforms, including opening of foreign direct investment in retail and insurance sectors.

Harsh Mariwala, president of the Federation of Indian Chambers of Commerce and Industry, said, “In the last few months, we have seen a fall in the announcement of new projects, and also a large number of projects, both in private and government sectors, are stalled for various reasons. As a result, the growth of manufacturing sector is moderating.”

Chief statistician T C A Anant said, “It is difficult to say, but one thing is clear that the new series will track slowdown more accurately than the earlier ones, so also recoveries.”

Whether declining industrial growth will prompt the Reserve Bank of India (RBI) to halt its rate hiking spree at its monetary review next week, economists said policy rates may still be raised, but the central bank may ponder over such a move later.

“The degree of slowdown in growth would have implications on RBI’s rate increase plans. Though the bias is to control inflation, there would be a close watch on growth numbers as well since the tightening over the last 12 months will start showing impacts now and over the next few quarters,” said Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Old Mutual Life Insurance Ltd.

Chief economic advisor Kaushik Basu did not give a direct reply to whether RBI will raise rates, saying the central bank will look at industrial performance and inflation numbers while taking a decision.

RBI has raised repo and reverse repo rates nine times since early 2010 to contain inflation, which stood at 8.66 per cent in April.