|Index of Indian Paralysis|
|Saturday, 12 May 2012 00:00|
Bad news on IIP front makes Rupee fall, RBI task tougher
Though March FY11’s higher growth (9.4%) no doubt exaggerated on the contraction in IIP in March FY12 (IIP contracted 3.5%), it represents a significant fall in trend growth—the last time there was a contraction in IIP growth, if you leave out the post-Lehman months, was in October FY12 (that too, though, was exaggerated by the high base effect). For FY12 as a whole, IIP growth is down to 2.8%, just marginally higher than that seen in Lehman year FY09 and much lower than FY11’s 8.2%. Within IIP, manufacturing is down to 2.9% for the full year versus the 3.9% projected in the advance estimates for GDP—in which case, FY12 GDP will be 6.7% versus the projected 6.9% on account of just the lower IIP.
Given its historic volatility, the IIP, of course, needs to be treated with more than an element of scepticism. Publishing/printing/ recording, for instance, continues its dream run with a 53% growth in March, over 60% in February, 56% in January and 58% in December. And it is difficult to see how electricity could grow 8.2% in the full year when IIP grew just 2.8%. It is true, of course, that manufacturing is just 16% of the economy, but electricity growth has generally been lower than IIP—in the few years it has been higher in the new IIP series, FY09 and FY10, it has only been marginally higher.
On a trend basis, however, IIP tends to be more representative, the slowing is consistent with what’s happening on credit growth as well as exports—in April FY13, exports were up just 3.2% y-o-y versus 32% y-o-y in April FY12. The most disturbing trend is the continued fall in intermediate goods, a leading indicator according to many. Intermediates contracted 2.1% in March FY12—they contracted 1% for the full year, something never seen since the index was recast in FY06. At minus 4.1%, capital goods also contracted for the first time since FY06, as did mining—given the problems associated with mining being brought to a halt in Karnataka and in RIL’s gas fields, this was to be expected.
What is more worrying, however, are the policy implications. Normally, a fall of this nature in IIP would call for lowering of interest rates, even though few would venture to suggest, as industry minister Anand Sharma did, that industry should be allowed to borrow at differential rates. Goldman Sachs, in fact, has said that it expects the IIP numbers, along with stable core inflation, will result in RBI cutting repo rates another 75 bps during the next seven months. But if policy paralysis, coupled with an anti-business stance of the government, is what is keeping investment away, lower interest rates may just aggravate overall demand and worsen the trade deficit, exerting more pressure on the rupee—lower interest rates will also depress debt inflows. The central bank’s task has just got a lot tougher.