Jun 13, 2007|
IIP: Growth in the laggards
The Index of Industrial Production for the month of April 2007 staggered most expectations by clocking a growth of 13.5% over April 2006. The industries that show the highest growth are mostly consumer products like food and beverages, jute, leather, chemicals and machinery other than transport equipment.
However, it will be incorrect to say consumption demand has exploded based on these growth statistics as almost all these sectors had negative growth rates in April 2006 (see table1). Some of this staggering performance can be attributed to a higher base effect. Electricity generation (amounting to 10.6% of the weight of the IIP) too has shown a brisk growth at 8.7% YoY.
Unfortunately even planned investments in mining have not been fully utilised. This sector, in the first half of FY07, had decelerated quite significantly and the April 2007 growth of 3.4% harks back to those times.
Manufacturing: the way the cookie crumbles
Source: Central Statistical Organisation
|The growing sectors.. (YoY %)
|Furniture & Fixtures
|Natural plant fibres
|Rubber, Plastic, Petroleum
|Non-Metallic Mineral Products
|and the slow growers..
|Metals & Alloys
|Wool, Silk & man-made fibres
It is interesting to note that capital goods in the form of machinery and equipment have shown a 19.2% growth in April 2007 as against the 12.6% recorded in the last quarter of FY07. But metal parts and alloys that go into making these machines have shown a significantly lower growth in the same period. So there seems to have been a lowering of demand to build more machinery for the future. Growth rates of other products that would normally reflect a rise in consumption namely textiles and apparels, paper and vehicles have all turned south.
Do we cheer?
There is no escaping the harsh realities of India's unstable power and transport situation. These are bound to temper the growth rates in manufacturing. The leaning of the Reserve Bank of India towards raising interest rates to curb consumption demand will further hurt companies. The actual numbers will probably reflect this over the next five to six months. The growth in steel and cement production already has steadied to sedate levels (between 5% and 10%) since the beginning of 2007, reflecting lower investments.
Also funds not only for consumption, but also for working capital and investments have become dearer in the last six months. However on the micro-scale, due to a shift of the hitherto unregistered sector getting into the mainstream thanks to the changed business environment, we will continue to see some positive growth at the lower end of the manufacturing spectrum.
Also higher consumer prices (average growth of 8% YoY) may just tilt the balance towards increasing consumption as people feel the returns on fixed income (at about 8% - 9%) would actually erode their capital base. Other than the low base effect, it is this phenomenon that can be reflected in the 22% growth of consumer non-durables like food products, leather and furniture.
Any action that is based on these seemingly high growth numbers in the mass consumption sectors could benefit with the luxury of some more time to see how this trend pans out over the next one or two months. Monetary factors like credit growth (that is slowing down gradually) and Reserve Bank of India (RBI's) fixation with the Rupee exchange rates will also impact the interest rate scenario. We sincerely believe it will be extremely counterproductive to domestic growth to raise interest rates yet again over the next one month.
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