This reflects impact of rising interest rates on investment, besides high base of last year
Industrial growth refused to be perked up, staying below 5 per cent mark for the fourth month in a row when it fell to 3.6 per cent in February. This reflects the impact of rising interest rates on investment, besides high base of last year when the growth stood way above at 15.1 per cent.
Economists, however, said consumer demand was still growing in the economy and had not yet displayed the dampening repercussions of interest rates. Consumer goods grew 11.1 per cent in February against a mere 6.3 per cent a year ago. Within that, consumer non-durables expanded 6.1 per cent against 0.8 per cent decline in February 2010.
“Still, consumption story is growing. Better job scenario and higher income in rural as well as urban India are driving consumption growth,” Yes Bank chief economist Shubhada Rao said.
The declining investment, as is reflected from capital goods whose production fell for the third month in a row — this time by 18.4 per cent, should put RBI in a tight spot over its rising rates hike spree, analysts said.
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Prime Minister’s Economic Advisory Council Chairman C Rangarajan today said interest rate had to be raised to control demand pressure. Commenting on IIP numbers that fell, he said the situation would turnaround next financial year.
He also maintained inflation should come close to seven per cent and said there should not be any cap on Foreign Institutional Investors (FII) inflow. He said, “March figures have shown some decline and by April-May, it (inflation) should come closer to seven per cent.”
But, RBI in all likelihood will raise policy rates by another 50 basis points in the next two policies as inflation has clearly emerged as a major concern. Overall, inflation rose to 8.31 per cent in February, despite rate of food prices rising at slower rate, clearly showing that manufactured product rates are on the upswing. The central bank has already raised policy rates eight times since early 2010.
For the first 10 months of the last financial year, industrial growth, as is measured by the Index of Industrial Production (IIP), stood at 7.8 per cent, thanks to high expansion in initial months, against 10 per cent a year ago.
This may lower overall economic growth rate a bit for the last financial year compared to 8.6 per cent, pegged by advance estimates of Central Statistical Organisation, since estimates had taken industrial growth to be 8.15 per cent for the entire 2010-11.
However, Planning Commission Deputy Chairman Montek Singh Ahluwalia does not think so. “I think agriculture growth will be higher than the earlier forecast (of 5.4 per cent). I don’t think that (industrial growth below 8 per cent level) will make a difference,” he said.
Chief Economic Advisor Kaushik Basu thinks March may also not show much improvement in industrial growth numbers, but April is likely to see reversal of low figures.
“Our expectation is that the next month (March) will not be a good month. So, there is one more difficult month ahead for us which is month of March... We will see no growth in the industrial sector. But, I do expect a big turnaround in April,” he said.
The dismal performance could be well gauged by the fact that manufacturing, which constitutes around 80 per cent of IIP, expanded by a mere 3.5 per cent in February, against a whopping 16.1 per cent a year ago.
To increase the share of manufacturing in GDP from the present 16 per cent to 25 per cent over a period of 10 years, the government is planning to come out with a manufacturing policy. However, the policy is struck in inter-ministerial issues with the labour and environment ministries not agreeing to flexibility in labour and environment laws in the proposed big industrial zones.
Now, Prime Minister Manmohan Singh has convened a meeting next month to resolve the differences, according to a PTI report.
In fact, if one takes out capital goods category, industrial growth stood at 8.6 per cent in February, which clearly showed investment was now a concern.
“The February industrial data print is a clear indication of consumption retaining strength but raises concerns over investment spending, which seems to be lacking pace in the economy,” Rao said.
