Giving clear signals and confirming India Inc.'s fears of a slowdown in the wake of high inflation, industrial growth plummeted to its 21-month low at 3.3 per cent in July, 2011, having witnessed a robust expansion of 9.9 per cent in the same month last year and a healthy 8.8 per cent in June this year.
With the global economic environment deteriorating further and a high interest rate regime put in place by the Reserve Bank of India (RBI) to contain the price spiral actually eroding business and investor confidence, it has been a double whammy for the domestic economic by way of a slowdown in growth in the midst of persistently high inflation.
Worst since Oct. 2009
The official data on the Index of Industrial Production (IIP) released here on Monday revealed that the industry's performance in July this year has been the worst since October 2009 when it grew by a mere 2.3 per cent following the severe impact of the global meltdown.
While manufacturing and mining sectors continued to be the laggards, the segment that signalled a slowdown in investment was capital goods which put up a dismal show with a negative growth of 15.2 per cent in July as compared to a nearly 38 per cent expansion in June this year. As a result, IIP growth for the April-July period this fiscal stood at 5.8 per cent as compared to 9.7 per cent posted for the same four-month period of 2010-11.
Not surprising that sensing the shape of things to come, apex chambers have been campaigning for a pause in rate hike by the RBI as the step appears to have curbed growth without taming inflation.
With the RBI's monetary policy due for review on September 16, Chief Economic Advisor Kaushik Basu appeared to agree with India Inc.'s argument. Commenting on the IIP data, Dr. Basu said: “…it [IIP numbers] is very disappointing ... It is a sign of slowdown. We are balancing between two very difficult problems. One is inflation which is persistent at close to 10 per cent and slowdown in growth ... the RBI will have to balance it out and take a decision.”
Indicating that the strategy to check inflation may have failed and has instead impacted economic activity and hurt growth, Dr. Basu said: “There is liquidity tightening taking place that is also probably having an impact … We have to seriously look at whether we should stick to the policy we have used, which is the very standard policy or begin to think out of box.”
The apex chambers could not agree more. Highlighting the seriousness of the situation, FICCI Secretary General Rajiv Kumar said: “Unless corrective policy actions are taken we may enter the negative territory soon.”
Target to be revisited
Prime Minister's Economic Advisory Council (PMEAC) Chairman C. Rangarajan also viewed that the industrial growth target for the current fiscal — projected at 7.1 per cent — will have to be revisited. “It is a disappointing number. One had expected that industrial production will be slightly higher than this …At the present moment perhaps, the numbers are not encouraging ... but if the industrial production does better in the second half, then the overall growth rate may be higher. I will say that we will have to revisit the area after one or two months,” he said.
Echoing similar views, Planning Commission Deputy Chairman Montek Singh Ahluwalia said: “It is clear that the IIP numbers are a disappointment. I think we need a pick up in investments.”
As per the IIP data, the output of capital goods nosedived into negative territory by 15.2 per cent in July as compared to a growth of 40.3 per cent in the same month last year. More importantly, the manufacturing sector, which accounts for more than 75 per cent of the index, grew by a paltry 2.3 per cent during the month as against an expansion of 10.8 per cent in July, 2010.
The mining sector's output also grew by a mere 2.8 per cent in July this year, much lower than the 8.7 per cent increase in the year-ago period. Alongside, production of intermediate goods declined by 1.1 per cent as compared to a growth of 8.5 per cent in July, 2010. Meanwhile, the IIP numbers for April also stands revised downward to 5.3 per cent from 5.7 per cent estimated earlier.
