Slowdown fears

September industrial growth rate is a wake-up call

The index of industrial production or IIP recording a 1.9 per cent growth rate in September, a two-year low, was no surprise. The signs of steadily decelerating industrial growth were evident in the three months since July 2011. In none of these months did industrial growth cross the four per cent mark. What, however, did cause a surprise was an attempt by the government to wish away the looming slowdown in industrial output with assertions that the Indian economy’s gross domestic product growth would continue to stay around eight per cent, notwithstanding the tepid industrial growth rates. With half the year gone and the cumulative industrial growth rate now ruling at around five per cent, almost half of what it was at the same time last fiscal year, the government would do well to revise its GDP growth projections for the full year to bring it closer to reality. It will serve little purpose to spring a nasty surprise on this front later in the year. Lower growth will put more pressure on the government’s finances and it makes sense to draw early lessons from these numbers and initiate necessary expenditure-management measures to limit the slippage in the fiscal deficit target of 4.6 per cent of GDP.

A disquieting trend in the latest industrial growth numbers is the sharp decline in capital goods production; it fell 6.8 per cent. This is a clear and dangerous pointer to a slowdown in investment activity in the economy. While the electricity sector came as a saviour of sorts, the other big factor that contributed to the dismal industrial growth figure was the mining sector. The decline in mining production is an unfortunate outcome of the series of corruption cases arising out of illegal mining in Karnataka. Mining activity in the state may have seen some revival of late, but the bad news is that mining in other states like Goa and Odisha is coming under closer scrutiny and there is no indication of any revival of activity in new coal projects, which had slowed down because of environment concerns. If there is any price the economy may be paying because of policy stasis or dithering by the governments, both at the Centre and in states, it is this.

Going forward, industrial growth prospects do not look bright, not the least because IIP had recorded 11 per cent growth in October 2010. This will scotch all hopes the government may like to derive from a low base effect. The Reserve Bank of India, on its part, may pat itself on the back that it had anticipated the impact its 13 interest rate increases in the last 19 months may have already had on growth and had, therefore, signalled a pause in further rate hikes. But as the slowdown signs become more prominent across sectors, the central bank may also like to wonder if it acted a bit late.