Weak April IIP data trigger call for cut in policy rates

Contraction in mining and capital goods pulls down industrial growth to 0.1%, FM says steps being taken to revive investments

A day after global rating agency Standard & Poor’s cautioned India could lose its investment-grade credit rating due to political inaction, official data today showed industrial expansion in April had barely managed to be in the positive zone, growing just 0.1 per cent in the first month of the financial year, despite a not-so-high base of 5.3 per cent growth in April 2011. In March, industrial output had contracted 3.15 per cent year on year.

Policy makers, bankers and economists expect the Reserve Bank of India may now cut policy rates and cash reserve ratio in its review next week.

High inflation and interest rates, splits in the ruling United Progressive Alliance (UPA) government over some key reform initiatives and the Euro zone debt crisis have weighed heavily on the country’s economy for more than a year. In 2011-12, the country’s economy had grown by 6.6 per cent, the weakest pace in nine years.

Pounded by a barrage of bad news, business groups want action on long-promised-for measures to encourage investment. But the government has found it difficult to implement even modest reforms. A public backlash against a recent petrol price increase forced it to temporarily shelve plans to cut costly diesel subsidies that economists say could ease pressure on the fiscal deficit front.

Finance Minister Pranab Mukherjee, who has been criticised for scaring off foreign investors with badly-timed tax reforms, promised action to restore confidence in the economy.

“We are taking several measures to kick-start the economy. The government is committed to ensuring faster project clearances, attracting new investments, both domestic and foreign, fixing regulatory issues, etc, to boost investors’ confidence,” Mukherjee told a meeting of bankers.

The country’s benchmark 10-year bond yield and swap rates dropped to multi-month lows on expectations the Reserve Bank of India (RBI) would cut rates by at least 25 basis points and possibly cut required bank reserves, too.

Need for support

Tuesday’s data showed the rise in industrial production was significantly lower than a Reuters poll forecast of a 1.7 per cent increase.

“The data clearly point to industrial growth being extremely weak, and it is in clear need of monetary as well as fiscal support,” said HDFC Bank Chief Economist Abheek Barua.

Capital goods, which include items like factory machinery, fell 16.3 per cent in April from a year earlier, while the mining sector output, another key economic driver, fell 3.1 per cent year on year in April. These two categories contracted after briefly expanding in February 2012.

Within mining, natural gas contracted 11.3 per cent in the month, even as coal production rose 3.8 per cent. Within capital goods, electric machinery and apparatus showed a negative growth of 49.2 per cent. Manufacturing, which dominates industry with a weight of over 75 per cent in IIP, remained more or less stagnant, posting 0.1 per cent growth. In the broad category, only electricity showed some resilience, growing 4.6 per cent, though lower than the 6.5 per cent in April 2011.

Some see silver lining in consumer goods expanding by 5.2 per cent. This category included interest-rate-sensitive consumer durables, which rose 5 per cent. But, economists did not seem to be enthused. ICRA economist Aditi Nayar said: “The improvement in growth of consumer goods benefits greatly from an easing base effect and is not indicative of a broad-based pick-up in consumer sentiments."

Expectations of lower interest rates will be further moulded on Thursday by the release of benchmark wholesale inflation data for May, which a Reuters poll forecast to have reached a 2012 high of 7.6 per cent.

S&P had cut the outlook on India’s long-term rating on India to negative from stable in April. The BBB minus rating is the lowest investment-grade level. Yesterday, the agency accused members of the ruling Congress party of a complacent belief that economic growth would come naturally, thanks to India’s demographics. It said the reform-minded Prime Minister Manmohan Singh was left without any political support.