Industrial output, which had been slowing down for some time, has now recorded an absolute decline with the index of industrial production for October down 0.4% from the same month in 2007. This is the first time in 15 years that year-on-year growth has been negative for any month and is a clear sign of the global meltdown affecting India much worse than had been anticipated. The last time the IIP registered Y-oY negative growth for a month was in April 1993. In August and September too, industrial production had registered low growth rates of 1.6% and 4.8% respectively. The consensus among analysts and economists is that the trend is likely to continue at least till November. Given the fact that industry accounts for about one-fifth of GDP, even scaled down GDP growth projections of 7% or more now seem ambitious.
Slackening GDP growth in turn could add to the job cuts and shutdowns of units already taking place, a prospect no government can be pleased about and certainly not in the run-up to general elections. What's more, nobody is sure that the government's stimulus package announced in bits and pieces since around the end of November will be able to trigger a significant recovery.
The malaise is clearly very widespread. In October, 10 of the 17 industry groups in the IIP recorded negative growth. The Economic Times in the intermediate goods sectors fell by 3.7% while the capital goods segment grew by barely 3.1%. Finished products segments - consumer goods, consumer durables and consumer non-durables --- suffered contraction of 2.3%, 3% and 2% respectively. This clearly suggests the economic slowdown has affected the common man's propensity to spend. CRISIL chief economist DK Joshi said the fall in consumer durables could be because of low demand due to unavailability of institutional financing.
Global rating agency Moody's attributed the poor performance of the industrial sector in India to the liquidity squeezing policy adopted by the RBI till October in its attempt to rein in inflation. The almost exclusive focus of the central bank on inflation meant it addressed growth concerns too late, suggested Moody's.
With exclusive focus of the central bank on inflation keeping interest rates higher, Fall in petroleum prices in the week ending December 6 led to a sharp fall in inflation to 6.84%, the lowest in the nine months. The annual inflation fell 1.16 percentage point from 8% in the week ending November 29 to 6.84% in the next week. The main reason for such a sharp dip were cut in petrol price by Rs 5 per litre Rs 2 per litre in diesel. The sharpest fall the price rise took place in fuel by 12.7%. In the manufactured product group also, which has 63.8% weightage in the overall basket of products, fell by 2.5 percentage points since August 2. The price rise in the manufactured food products also slowed down drastically by 6.4% points on year on year basis since August 2.
This will offer enough scope to RBI to usher in a liberal monetary policy, ensuring a softer interest rate regime. This trend of falling inflation will lead to fall in interest rate. RBI should cut interest rate expeditiously and by a significant quantum. It must also ease availability of credit further." Industry chamber Assocham wanted the CRR and policy rates at 2004 level so that stressed sectors, particularly cement, steel, mining, aviation, banking and finance, can boom again.
Home minister P Chidambaram, speaking for Prime Minister Manmohan Singh, who now holds charge of finance, told Lok Sabha on 19th Dec, "Floating interest rates must come down. The loans for existing home loans will be reset as the PLR is reduced." Chidambaram said that steps had been taken to address the liquidity crisis but banks remained risk averse while those seeking home loans were deterred by the 12-13% rates being currently charged. "I am sure that banks will sincerely attempt to reset the floating rates," said the minister. Chidambaram explained, the housing sector is a critical part of the economy as "it concerns steel, cement, bricks, electrical equipment, labour of various kinds... it is a major driver of the economy".
However, the inflationary trend in food articles like rice, wheat and edible oils have not decelerated so steeply. When the overall annual inflation fell to 6.84%, the inflation in food articles remained over 10%. Pressure is now likely to build on the government to do more to revive industrial growth. With General elections ahead Government has to balance its strategy between inflation and growth rate where there is a myth saying these two are complementary in nature.
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