IIP growth slows to 4.1%, rates & global woes bite

India’s industrial output grew at an anaemic pace of 4.1% in August, a notch slower than its expansion a year ago. Output as measured by the index of industrial production (IIP) grew slower as mining output contracted and overall demand and investment suffered thanks to high interest rates and a bleak global outlook. Economists said that despite the slippage, which is sure to reflect in GDP data for the July-September quarter, the Reserve Bank of India (RBI) is expected to focus on combating inflation, which was uncomfortably high at 9.78% in August, and raise benchmark lending rates by another 25 basis points on October 25.

India’s GDP grew 7.7% in April-June, the slowest pace in six quarters. The RBI, which has stuck to its 8% growth forecast for the fiscal, might pare down its estimate a bit. The September inflation rate is expected to be around the August figure, according to independent surveys, but the central bank’s optimism that the rate would ease to 7% by March is not shared by many as a weak rupee could inflate import costs.

The RBI will change its policy stance only if inflation eases and further rate hikes will depend on the price rise situation, said deputy governor Subir Gokarn. “It (further rate hike) depends on the inflation situation,” he said. “We raise rates not because it is an end in itself. To the extent we see the problem persisting, then there is a basis to raise rates, but if we see the problem is starting to ease off, then that would provide the basis for a change,” he added.

Finance minister Pranab Mukherjee said: “It is a bit disappointing and it may affect GDP in the second quarter.” Officials in the finance ministry, however, found solace in the trend that industrial output shows better results in the second half of the fiscal.

Capital goods output, a barometer of investment activity and which has shown high volatility in recent months, recovered a bit from a negative growth of 13.75% in July to 3.9% in August.

A slump in consumption demand was evident in the unimpressive 3.7% growth in consumer goods in August, compared to 4.6% growth in the corresponding month a year ago. A saving grace in the Central Statistical Office data released on Wednesday was a healthy 9.5% growth in electricity output in August, compared to a mere 1% growth a year ago.

Industrial output growth in August is the slowest since June, when an 8.8% expansion was reported before it spiraled down into a revised a 3.8% growth in July. Manufacturing, which accounts for three-fourth of industrial output, grew at a tepid 4.5% in August compared to a year ago and 3.14% in July. Mining output contracted 3.4% in August, against a 5.9% growth in the corresponding month last year suggesting it will eventually eat into the growth of electricity generation and steel production. Power generation grew at 9.5% in August from a low base of 1% a year ago.

Economists said it is difficult to draw a conclusion about the prospects of the economy from the capital goods data as it is highly volatile. However, feedback from the industry indicates that the order pipeline is dwindling due to the poor investment climate, they said. India’s exports grew 36.3% in September from a year ago to $24.8 billion, commerce secretary Rahul Khullar said on Wednesday, even as he saw a sign of deceleration given that the growth in August was an even higher 44.3%.

“There is no comfort on the inflation front, whereas there is rising discomfort on the growth front. Unless there is some relief on inflation, RBI’s tight monetary stance is likely to continue,” said Crisil director and principal economist DK Joshi, who expects a 25-basis point increase in the rate at which the central bank lends to and borrows from banks. RBI has raised the key repo rate 12 times since March 2010 to 8.25%, leading to higher borrowing costs that has affected consumer spending and growth. Consumer goods output grew at 3.7% in August compared to a 4.6% growth a year ago. Within this category, consumer durables production expanded by 4.6% in the month, nearly half the pace at which it grew a year ago.