Industrial production crawls

Coming months to see further weakening as global conditions steadily deteriorate.

The economy is not slowing down; it’s already in the midst of a slowdown. Factory output for September has grown by 1.9 per cent year-on-year, slowest in two years. In addition, the August industrial production growth has been revised down to 3.6 per cent from the 4.1 per cent reported earlier. According to Deutsche Bank, September’s industrial production growth of 1.9 per cent has pushed the three–month moving average to 3.1 per cent year-on-year for the month, down from 5.6 per cent in August. In sequential terms, industrial production contracted by 1.3 per cent month-on-month.

Economists say the Reserve Bank of India (RBI) has achieved only a part of what it had set out to. The steady increase in interest rates has adversely impacted sales of consumer goods and automobiles. Demand for credit was also down in the first half of FY12. However, demand destruction has not resulted in falling prices, the real purpose of rate increases. A turbulent global situation has further soured the economic climate. Mole Hau, economist with BNP Paribas, says: “With the economy now clearly the weakest since early 2009, hard landing risks continue to climb, With a substantial fall in inflation still months away and the rupee shaky, policy ‘space’ is cramped.”

As is apparent from weakening consumption numbers, the slowdown is being felt across the board. By use-based group, the decline in overall industrial production was led by the capital goods sector, with output dropping by an estimated seven per cent month-on-month. Manufacturing too is down one per cent month-on-month.

Economists expect factory output to remain weak. While overall factory output has slowed, the downside risks increase as coal shortage is likely to worsen the situation for the manufacturing sector as a whole. While electricity sector growth remained buoyant at nine per cent, coal shortage is likely to kick in over the coming months. BNP Paribas says the Central Electricity Authority (CEA) has reported the number of power stations reporting ‘super critical’ levels of coal stocks (less than four days’ supply) had tripled over the last two months to 31 power stations (35 per cent of the total) by early November. This threatens to curb power utilities and, hence, overall industrial output, at least in the near term.

All eyes are now on the central bank now. Kislay Kant, senior director research at MAPE Securities, says: “RBI will now have a fresh look at growth issues in the economy, as well as the fact that rising interest rates will impact the asset quality of banks. Therefore, a relatively softer tone in the next RBI meeting is possible. That would help restore confidence for better investment climate in 2012. Otherwise, the India growth story is starting to look weaker and poised to test the lower limits.”