January IIP: Industry beats gloomy forecast, grows 6.8%
For reasons ranging from progress on Europe's debt crisis to a slowly improving housing market to slightly less gridlock in Congress, the economy and the job market appear better able to withstand setbacks than they were in 2011.
India’s industrial output, measured by the index of industrial output or IIP, registered a brisk growth of 6.8 per cent for January 2012, a rate much higher than the expected 2.1 per cent by experts, as well as the 1.8 per cent expansion in December 2011.
However, data released on Monday showed that manufacturing grew at a feisty 8.5 per cent and electricity at 3.2 per cent over the corresponding period in the previous year. Mining, which has been hit in multiple states by bans, registered negative growth of 2.7 per cent.
Capital goods recorded a negative growth of 1.5 per cent while consumer goods grew at a rapid 20.2 per cent. In fact, consumer goods were dragged by negative growth in consumer durables of 6.8 per cent over the corresponding period last year.
The IIP numbers are encouraging, said C. Rangarajan, the chairman of the Prime Minister’s Economic Advisory Council, and a former governor of the Reserve Bank of India, but added that the “behavior of consumer durables was disappointing”.
The growth in IIP is particularly welcome, given that GDP growth has also been slow: numbers for the quarter ended December 2011 showed that the Indian economy grew at a leisurely 6.1 per cent, the slowest pace of growth since 2008.
However, indicators of an uptick in manufacturing were to indicated in the manufacturing Purchasing Managers' Index (PMI), which jumped to an 8-month high of 57.5 in January.
The February PMI survey showed continued healthy expansion. Though the headline pace slowed slightly to 56.6, new orders touched a 10-month high.
IIP was widely expected to be dragged down by weak growth in the core sector – comprising coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity – which slowed to a mere 0.5 per cent growth in January.
Earlier data showed that core sector growth – comprising coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity -- slowed to 3.1 per cent in December 2011, from 6.3 per cent in the year-ago period.
The decline in both capital goods and consumer durables, however, reveal critical chinks in the growth story. A growth in capital goods, such as machinery and equipment, that are key inputs for industry, suggests investment by industry and is an important measure of confidence in the economy.
The slowdown in January indicates that corporates are still cagey about demand and are therefore unwilling to invest in capital goods at this point, as well as an unwillingness to take on high-interest debt to fund such expansion.
Similarly, the slowdown in consumer durables – usually big ticket, one-time purchases that household make and are typically lifestyle choices – shows demand on the part of consumers who are also likely holding on to their capital. Additionally, rising inflation at the retail level has meant that there is less money left over for expensive buys, especially at the beginning of the year when prices have returned to a full level.
Industry bodies have been calling for cuts in interest rates, demands that have acquired stridency despite a 0.75 per cent cut in the Cash Reserve Ratio (CRR), or the portion of deposits banks must keep with the Reserve Bank, on Friday.
The CRR cut is expected to release Rs48,000 crore into the system, but with a liquidity deficit of over Rs 1 trillion, experts say interest cuts are still the need of the day to boost investment and expansion in industry.
The Year So Far: IIP in Fiscal 2012
January 2012 (forecast) 2.1%
December 1.8%
November 5.9%
October -4.7%
September 2%
August 3.6%
July 3.8%
June 9.5%
May 6.2%
April 2011 5.3%
(With inputs from Thomson Reuters 2012)