The latest industrial growth data or Index of Industrial Production (IIP), released by the Central Statistical Organization on Tuesday, showed that the country's industrial output rose to 5.4 percent in June, up from a revised figure of 4.1 percent in May but lower than 8.9 percent posted in the year ago period, indicating that the economy might be cooling down, weighed by high inflation rate and decline in credit growth.
According to the data, the manufacturing sector, which accounts for over 79 percent of the IIP, grew by 5.9 percent in June 2008, up from a revised figure of 4.2 percent in May, but lower than 9.7 percent posted a year ago.
Consumer durables grew 3.5 percent in June 2008 against a negative growth of 3.6 percent in the year ago period. The performance of the consumer non-durables segment was even better as it recorded a growth of 12.2 percent during the month as compared to 6.3 percent in June 2007, pushing up the overall consumer sector growth to 10 percent.
Capital goods, a key gauge of industrial activity, rose 5.6 percent in June 2008 as against growth rate of 23.1 percent a year earlier, while the mining sector bounced back to post 2.9 percent growth in June 2008 compared with 1.5 percent posted in June 2007.
Intermediate goods sector grew 2.9 percent in June against 8.6 percent while basic goods grew 2.9 in the period under review, down from 9.2 percent a year ago.
Out of 17 industry groups, only 10 managed to post positive growth in June 2008. Interestingly, in March 2008, 12 industry groups had shown positive growth, indicating widening of a slowdown. The industry group 'Beverages, Tobacco and Related Products' showed the highest growth of 22.3 percent, followed by 12.6 percent in 'Transport Equipment and Parts' and 11.5 percent in 'Basic Chemicals and Chemical Products.'
On the other hand, 'Food Products' group, which have a 9.1 percent weight in the IIP, continued to trade in negative growth terrain, down 3 percent in June 2008 as against a positive growth of 0.5 percent in June 2007.
Groups like 'Jute and Other Vegetable Fiber Textiles,' 'Wood and Furniture,' 'Leather and Fur Products,' and 'Paper and Printing' also posted negative growth of 9.8, 1.3, 2.5 and 2.4 percent respectively.
In cotton textiles, growth slipped 1.1 percent in June 2008 from 7 percent in June 2007. The basic metals and alloys industry, which appears to have been hit by higher input costs, grew just 5.9 percent in the period under review as compared to 21.3 percent in June last fiscal.
However, machinery and equipment continues to hold steady with 9.2 percent growth as against 11 percent in the previous year.
The latest data also showed that growth of six core infrastructure industries, which account for 26.7 percent of industrial production expansion, slowed down to 3.4 percent in June 2008, from 5.2 percent in June 2007.
Petroleum refinery production (weight of 2 percent in the IIP), electricity generation (weight of 10.17 percent in the IIP), and cement production (weight of 1.99 percent in the IIP) showed slowdown in growth, rising 5.6 percent, 2.6 percent and 3.8 percent respectively in June 2008, compared to growth rate of 9.9 percent, 6.8 percent and 6 percent in the year ago period.
Crude oil production (weight of 4.17 percent in the IIP) registered a negative growth of 4.7 percent in June 2008 compared to a negative growth rate of 1.8 percent in June 2007.
Growth rate of finished (carbon) steel production (weight of 5.13 percent in the IIP) declined marginally to 4.4 percent in June 2008 compared to 5.1 percent in June 2007.
However, coal production (weight of 3.2 percent in the IIP), bucking the declining trend, registered a healthy growth of 6.2 percent in June 2008 compared to growth rate 0.9 percent in June 2007.
According to market analysts, the latest data on industrial growth was in line with expectations, though lower than the double-digit growths seen in 2006 and early 2007, due to tightening monetary policy and rising borrowing costs.
"The number has come in higher than our expectation, but the trend is clearly weakening as a result of higher interest rates, rising input costs and slowing global demand," said Sonal Varma, economist at Lehman Brothers in Mumbai.
D.K. Joshi, principal economist at domestic ratings agency CRISIL, said the IIP figures show that overall industrial performance in India continued to remain weak. According to Joshi, the growth rate has halved because of monetary tightening by the Reserve Bank of India (RBI) over the past year coupled with the slowing down of global economy and pressures coming from high commodity prices, particularly crude oil.
"We are in an industrial scenario which appears decisively weak. The IIP may pick up but it is going to be slightly subdued vis-a-vis last year. The underlying trend is that growth is weakening," Joshi said, adding that IIP could average out to above 7.5 percent for the current fiscal, but could be worse next year.
According to Axis Bank economist Saugata Bhattacharya, the data on IIP growth rate suggests "a continuing slowdown in industrial growth."
"Infrastructure slowdown is a supply-side issue. Capacity constraint is always a problem in coal, power and crude oil sector. Also the monetary tightening affecting the growth is obvious," Bhattacharya said.
"In terms of individual industries, the highest growth segments were textiles, chemicals and transport equipment. The first two indicate that exports have become a significant driver for industrial growth. Whether this will sustain following the partial reversal in the rupee remains to be seen," the Axis Bank said in a report.
"With first quarter GDP numbers for 2008-09 set to be released this month-end, Axis Bank expects a slowdown in some service segments that are linked to industrial activity. "If industrial growth continues to be tepid for the next few months, we might need to revise our GDP forecast for 2008-09 below 7.5 percent. This might not happen with the resurgence in the monsoon rains," the report said.
"The June data suggests weaker industrial production has set in," Goldman Sachs economists Tushar Poddar and Pranjal Bhandari said in a research note. "Coincident indicators like non-food credit growth, cellular subscriptions and commercial vehicle sales suggest a moderation in activity rather than a sharp slowdown, and we expect this trend to continue this financial year."
"However, with inflation remaining well above the RBI's (Reserve Bank of India) target range, we continue to expect one more round of rate increases of 25 basis points on the repo rate and 25 basis points on the cash reserve ratio by end-October," they said.
According to Abheek Barua, chief economist at HDFC Bank in New Delhi, if inflation risks abate a bit, growth would have an impact on monetary policy.
"In coming months, I see the IIP growth figure to hover at around 6-7 percent. I am not able to solve the puzzle as to why there is surge in the consumers durable segment. The RBI has been tightening the monetary measures, and credit the offtake has come down. In this scenario, I see no reason for surge in consumer durable segment. As for consumer non-durables, the growth must have been aided by good monsoon witnessed in some parts of the country and prospects of a better produce," Barua said.
"I think the monetary policy measures being taken since January this year are beginning to impact the industrial growth. Our GDP growth projection remains at 7.8 percent as the industrial growth outlook is not very promising," said Rajeev Kumar, CEO, Indian Council for Research on International Economic Relations (ICRIER).
"The RBI will also have to be very careful in its future decisions. If it continues to tighten monetary policy, it would have an adverse impact on the industry," Kumar said.
India's biggest bank, State Bank of India raised its benchmark prime lending rate (BPLR) by 100 basis points (1 percent) to an annual 13.75 percent effective Tuesday.
State-run Indian Overseas Bank and Indian Bank also hiked their BPLRs by 50 basis points and basis points respectively.
The rate hikes follow central bank, Reserve Bank of India's (RBI) decision last month to increase its key lending rate or repo rate by 50 basis points, to a 7-year high of 9 percent, and banks' cash reserve requirements or CRR by 25 basis points to 9 percent.
The move prompted India's largest mortgage lender Housing Development Finance Corporation (HDFC) and other top banks including ICICI Bank and HDFC Bank to raise their respective prime lending rates.
However, some analysts are optimistic that the economy would bounce back.
"IIP numbers for June were in line with expectations. The growth has definitely slowed compared to last year. Though this moderation raises some concerns on the overall growth, we do not see the situation worsening. The moderation in IIP is due to previous tightening by RBI. Inflation being the key priority, both RBI and the finance ministry have traded growth for containing inflation," said Krupesh Thakkar of India Capital Markets.
"Even though industrial production has almost halved to 5.2 percent in the first quarter vis-a-vis 10.3 percent last year, it is surely looking up on a sequential basis. We expect industrial growth to touch 7.5 percent towards the year-end," said Manish Sonthalia, vice president (equity strategy), Motilal Oswal Securities.
Agrees Ketan Karani, vice president, Kotak Securities. "IIP figures were very much on expected lines. We'll experience some lag effect for another 2-3 months ahead before it shows some real improvement," Karani said.
Meanwhile, all analysts agree that the RBI's move to tighten monetary policy to tame inflation, would adversely affect India's economic growth.
India's economy grew about 9 percent in the fiscal year which ended in March, but high oil and food prices led to India's wholesale price index (WPI)-based inflation rate soaring to 12.01 percent in the 12 months to July 26, higher than previous week's figure of 11.98 percent.
While the RBI last month cut its growth forecast for the current fiscal year (FY09) to 8 percent from the earlier 8-8.5 percent, economic think tank National Council of Applied Economic Research (NCAER) revised India's economic growth projection to 7.8 percent, down from an earlier estimate of 9 percent for the current fiscal year.
"The diminished growth is on account of slower global growth and higher rate of inflation," NCAER said in its quarterly review of the economy.
Earlier, investment bank Goldman Sachs kept India's growth forecast for fiscal year 2009 at 7.8 percent due to a weak investment outlook on account of rising interest rates, while credit rating agency Moody's said inflation in India would continue to remain at 11.5 percent during the current fiscal and cautioned India that its sovereign ratings outlook may turn from the current 'stable' to 'negative' if its fiscal policy failed to contain the external shocks such as high crude oil prices or further aggravated inflationary concerns.
While Standard and Poor's chief economist for Asia Pacific Subir Gokaran said that the rating agency's forecast of 7.8 percent economic growth for India this year takes into account the pattern in the industry and the industrial slowdown is not surprising, Soumendra K Dash, chief economist at CARE Ratings, said even a 7 percent economic growth rate for the current fiscal would be nothing short of an "achievement."
"With the monetary policy unable to tame inflation and crude oil prices rising consistently, our outlook on the GDP growth is grim," Dash said.
However, the sentiment of Corporate India continues to be upbeat.
"There is no need to worry as this data is fluctuating and the investment in the capital formation continue unabated. Investment in the capital form should ensure a growth rate of 7.5-7.75 percent in the current fiscal," said Rana Kapoor, founder and CEO, Yes Bank.
According to Venugopal Dhoot, chairman, Videocon Industries, despite high inflation rate, India is faring better than other countries. "India has now become part of the global system and in comparison to what is happening worldwide, India is doing better. Since the government has adopted corrective measure in terms of taxation and with the economy growing at 8 percent, the next six months should see a better situation," Dhoot said.
Agrees Sunil Khandelwal, CFO, Alok Industries. "This is not the impact of the last one or two months, it takes time for the production to catch up. However, I don't think there will be any material slowdown and in the next 6 months I definitely see growth ahead," Khandelwal said.
Apex industry chambers, however, have mixed opinions.
According to Sajjan Jindal, president of Associated Chambers of Commerce and Industry (ASSOCHAM), even if the industry is accorded to the best possible packages in terms of incentives and concessions, the GDP growth is unlikely to be close to 9 percent. "We would be lucky if India achieves a GDP growth of 8 percent as in first quarter of current fiscal, since industrial production has suffered heavily," Jindal said.
But Anjan Roy, economic advisor, Federation of Indian Chambers of Commerce and Industry (FICCI) holds a different view. "The industrial growth is showing a recovery trend. It is a good thing. There is a need to maintain the trend," Roy said.
According to Roy, if the economy managed to grow at a rate of around 8 percent in the current fiscal, it would not be a small achievement given the recession in the global market, and high prices of crude oil.
"Indian economy will certainly bounce back in coming months. What is being witnessed today is just a momentary phase," he said.
Meanwhile, Montek Singh Ahluwalia, deputy chairman, Planning Commission, said there was need to speed up the industrial growth rate if the economy had to register an overall 8 percent growth rate.
Ahluwalia acknowledged that India was growing more slowly this fiscal than in the last. However, "one month's industrial growth rate cannot and should not be taken as an indicator of the final growth rate in the current fiscal," he said.
