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Moderating Industrial Growth

The tepid IIP growth witnessed in December 2010 is a sign of slowing industrial activity…

As was widely anticipated, a high base dragged down the growth of the Index of Industrial Production (IIP) number for the month of December 2010. What can also not be denied any longer is that industrial activity within the country has moderated.

In December the IIP Index registered a growth of 1.6 per cent year-on-year (y-o-y). This was lower than the 3.6 per cent (revised figure) growth registered in November. In fact, it is the lowest rate of growth in the past 20 months. According to a recent report from Motilal Oswal Securities, “Inflation has started putting wage- and input-cost pressures. Rising interest rates and stressed liquidity conditions for a prolonged period may begin to hurt credit and industrial growth.”

High Base Effect
Part of the low growth in IIP can be attributed to the high base, a statistical phenomenon. In December 2009, the IIP index had registered the highest growth ever of 18 per cent.
But moderation in industrial activity can also not be denied. The year-to-date (since April 2010 this FY) IIP growth has softened from 9.8 per cent in November 2010 to 8.9 per cent in December 2010. Adds the Motilal report: “An increase in macro-economic risks and heightened uncertainties in the investment climate are the plausible reasons for industrial slowdown.”
The major drag on the index was the capital goods sector. Slowdown in investment activity is getting reflected in weaker growth of this segment. This index shed 13.7 per cent (y-o-y) in December against 12.8 per cent (y-o-y) growth in November 2009. Although on a month-on-month (m-o-m) basis this index recovered a bit, its declining streak continued. It shed 4.1 per cent compared to a 7.3 per cent decline in the previous month.
The other sector that saw a persistent decline in growth was consumer non-durables. Although it registered a marked jump of 19 per cent on an m-o-m basis, on a y-o-y basis it declined 1.1 per cent.

A Few Positives
There are a few positives as well. Twelve out of 17 industry groups showed positive growth in December 2010 compared to the previous year. In November only nine industry groups had posted positive growth. The upward revision of the November IIP figure is also a positive.
The most encouraging growth came from the consumer-durable sector which recovered significantly. This index rose 16.7 per cent m-o-m compared to the 7.9 per cent m-o-m drop it had witnessed in November 2010. On a y-o-y basis the index registered a gain of 18.5 per cent.

What Lies Ahead
It will be challenging for the industrial segment to deliver substantial growth in Q4FY11, given the high base of Q4FY10. Experts are of the view that high inflation could play spoilsport for industrial growth in the coming months. It may put pressure on the Reserve Bank of India (RBI) to hike interest rates which would in turn deter credit demand, consumption and investment. Tushar Poddar and Vishal Vaibhaw of Goldman Sachs believe that interest rates are likely to go up further. “We expect RBI to hike policy rates by 25 basis points (bps) in its March 17, 2011 meeting. Beyond that, we believe RBI will hike policy rates by another 50 bps in calendar year 2011,” they say in a recent note.
Thus while industrial growth has definitely slowed down in the country, its future course will be determined by how inflation and interest rates move during the rest of the year.