The evidence mounts

The December 2007 numbers for the Index of Industrial Production (IIP), released yesterday, serve to confirm the deceleration that is taking place in the industrial sector. After a significant dip in November, when the growth rate came down to barely 5 per cent, December was better, but not by enough to provide any cheer. The overall index grew by 7.6 per cent over December 2006, compared with 13.4 per cent in the preceding year. In the manufacturing segment, which accounts for almost 80 per cent of the index, the December 2007 growth rate was 8.4 per cent, compared to 14.5 per cent a year earlier. For the year to date (April- December 2007), the general index grew by 9 per cent, compared to 11.2 per cent over the same period last year, while the manufacturing index grew by 9.6 per cent, compared to 12.2 per cent last year. Both the absolute magnitude of the recent monthly growth rates and the significant month-to-month volatility suggest waning momentum.

Across specific segments, the most striking negative performance was in the metal products and parts category, which actually declined by over 23 per cent during December, taking its year-to-date growth rate to a negative 7 per cent. Other segments that took a beating were non-metallic mineral products (mainly cement), leather products and wool, silk and man-made fibre textiles. The metal and cement patterns suggest a slowdown in construction activity, a perception which is reinforced by the fact that many institutions are cutting their lending rates for housing finance. The leather and textile product slowdown probably reflects the impact of a stronger rupee, as both sectors export a significant proportion of their output. This interpretation is supported by the growth rates in other textile segments, which, while positive, are very low. The other important segment that has been sluggish for some months is transportation equipment, which improved in December to almost 6 per cent, but its year-to-date performance is only 3 per cent. Within the use-based classification of industries, the consumer durables segment, which has also been quite sluggish in recent months, maintained that pattern, growing by about 2 per cent in December, but declining by over 1 per cent during the April-December period. Both transportation equipment and consumer durables are relatively sensitive to interest rates, clearly indicating that rising rates have contributed to reining in demand for a slew of manufactured products.

It must be pointed out that very little, if any, of this deceleration is attributable to global factors. Instead, it is largely the result of the domestic business cycle playing itself out. The policy response to this is quite clear; interest rates must be brought down. The dilemma that was so strikingly reflected in the Reserve Bank of India's (RBI's) quarterly policy announcement last month is essentially one of timing. While this newspaper had recommended a rate cut, the central bank felt that, with the threat of inflation looming, it was too soon to cut rates. Equally, however, delay may well let the slowdown take a firm grip, reducing the effectiveness of future cuts. The December IIP numbers add one more piece of evidence to support the conclusion that the feared slowdown is here. The question that remains is whether the RBI waits until April to respond, or acts sooner.