Disappointing March IIP numbers, output falls by 3.5%

Capital goods takes toll as output falls by 21%, overall manufacturing drags, lower by 4.4%

Industrial production contracted 3.5 per cent in March, dragging the cumulative factory output growth last fiscal closer to the level of global financial crisis period of 2008-09. This clearly indicated that economic expansion has really slowed down and it may not be possible for India to really grow its GDP by 6.9 per cent during 2011-12 as was calculated in advance estimates.

However, RBI saw growth slow down to bottom out and stuck to its projection of 7.6 per cent growth for this fiscal, closer to budget assumption of 7.6 per cent.

Industrial growth entered negative zone for the second time last fiscal -- the first one in October at -4.9 per cent -- taking the 2011-12 factory output growth to 2.8 per cent, just above 2.3 per cent witnessed in 2008-09, when US financial services icon Lehman Brothers collapsed.

 

None of the broad sectors really showed up --be it dominant manufacturing (-4.4 per cent), mining (-1.3 per cent) or electricity sector (2.7 per cent) in March, official data released today showed.  

Really dismal picture was presented by capital goods output which contracted by over 21 per cent. Other categories also did not perform well-- intermediate goods (- 2.1 per cent), consumer durables (0.2 per cent), consumer non-durable (1 per cent) and basic goods (1.1 per cent).

All the three major segments of the Index of Industrial Production (IIP) slowed down and only 10 sectors out of 22 showed positive growth in manufacturing in March 2012 vis-à-vis 18 out of 22 in February. Slight indications of coming IIP numbers were given by contraction of exports and just 2 per cent growth in eight core sector industry, comprising over one-third of IIP in March.

Finance Minister Pranab Mukherjee blamed global demand and investment activity for IIP contraction in March.

"The IIP figures are disappointing... Continued weak global business sentiments are also adversely impacting recovery in domestic private investment. Domestic investment recovery remains frail," he said

While chambers asked for further cut in policy rates by the Reserve Bank, Prime Minister's Economic Advisory Council chairman C Rangarajan said the central bank may be in a classic dilemma if non-food manufactured product inflation rises again.

The Finance Minister said it will take some more time for transmitting RBI's last policy rate cut decision into interest rates. "RBI's monetary stance has been reversed in last policy announcement, it will take some more time for interest costs to come down."

He said part of the dip in March IIP numbers is due to high base effect. In fact, the Index of Industrial Production (IIP) was highest in terms of points at 186.4 in March in the entire 2011-12. However, in the same month last fiscal, it was much higher at 193.1 points. Similarly, all sectors--manufacturing, electricity and mining--showed the highest index in March in the whole of 2011-12. This was the case even in capital goods industry, which was the main culprit in pulling down IIP growth.

But, the base effect cannot explain the entire story behind contraction in factory output in March. RBI deputy governor Subir Gokarn said in Bangalore the data reinforces the slowdown trend in the country.  “The moderating inflation was a result of the growth slowdown”, he said.

CII director-general Chandrajit Banerjee said the data raised concerns that the economy might be showing early signs of a vicious cycle of de-growth.

Given the weak fiscal condition of the Centre, the policymakers have declined any stimulus package and said implementation of projects needs to be expedited.

“IIP numbers are disappointing.. I don't think, the solution is stimulus. In my view, there are a lot of these things to do with project implementation. That is not the result of stimulus," Planning Commission deputy chairman Montek Singh Ahluwalia said.

In fact, chambers also did not ask for stimulus. “It is high time that government fast tracks the implementation of major projects which will increase the overall confidence and also stimulate growth in the industrial sector” said Ficci President R V Kanoria.

However, Gokarn saw a mild recovery coming in this fiscal and retained RBI's projection of 7.5 per cent this fiscal.

"Our outlook for the year 2012-13 is for a mild recovery in growth. Our projection in the April policy statement was that the growth for 2012-13 was at 7.5 per cent," he said.

However, for last fiscal economists and industry players are sure that growth would not be 6.9 per cent.   “It is also certain now in the context of current industrial growth figures that the GDP growth for 2011-12 will be much below 6.9%”, Kanoria said.

With industry barely growing by 2.8 per cent in 2011-12, the overall GDP growth for FY12 would be below expected level," Arun Singh, senior economist Dun and Bradstreet, said. Advance estimates had taken industry (excluding construction) to grow 3.6 per cent for 2011-12, but it actually expanded by just 2.8 per cent.