Sharper than expected

The Index of Industrial Production (IIP) for September 2007, released yesterday, says industrial output grew by 6.4 per cent over September 2006, the slowest growth rate so far in the current year. This was due primarily to a modest 6.6 per cent growth in manufacturing output, which accounts for about 80 per cent of the index, the other 20 per cent coming from mining and electricity. This takes the growth rate of industrial production for the first six months of 2007-08 to 9.2 per cent, compared to 11.1 per cent during the first half of 2006-07, with the second quarter being under 8 per cent "" 7 per cent in July, a recovery to 10 per cent in August, and now 6.4 per cent in September. The first quarter's growth numbers, it should be recalled, were boosted by the spectacular, even incredible, performance of two sectors "" food products and wood products. The former has a relatively large weight in the index basket, the latter far less so. But, when a small sector grows at close to 100 per cent, which is what wood products did for a few months, it has a discernible impact on the aggregate. When these sectors started to move to more realistic rates in July, the aggregate growth rate declined noticeably. The sharpest slowdown has been in manufacturing. This reinforces the view that there has been a slowdown, however moderate, in a sector that has been a significant contributor to the GDP growth acceleration of the last few years.

Some critical industries, notably machinery and equipment, have sustained relatively high growth rates, while others, such as transport equipment, have seen sharp declines. More broadly, the dispersion of growth rates across industries has increased over the past few months, suggesting that a strong underlying trend is keeping some of them buffered against cyclical forces, while others are showing the impact of these forces. The sustained growth in machinery and equipment suggests that investment activity persists, reflecting optimism among firms about prospects beyond any immediate downturn. On the other hand, the markedly slower growth this year in transportation equipment reflects higher interest rates, which, incidentally, are beginning to turn lower, as well as some level of saturation in commercial vehicles, sales of which grew very rapidly over the previous three years. Higher interest rates also seem to show up in the significant slowdown in consumer durables as a category; rising monthly commitments presumably make big-ticket purchases more difficult. The rider here should be that the index for consumer goods is out of date and probably understates actual growth. But another industry showing relatively weak growth during the first half is textile products. The stronger rupee presumably has something to do with this, reflected in the persistent concerns voiced by export associations.

Overall, the first-half numbers reinforce the view that many people have held for some time. GDP growth is very likely to be slower during 2007-08 than the scorching pace of 2006-07 and the industrial sector is likely to bear the brunt of the slowdown. However, the dominant expectation is that the slowdown will be moderate, a percentage point or less in the overall growth rate, and these numbers are consistent with that outlook.