Capital goods downturn points to slowdown

New Delhi: While the rebound in industrial production estimates for November brought in some cheer, the moderating investment climate, as indicated by the downturn in the capital goods sector, coupled with waning output in core sectors, such as mining, could be clear pointers to a slowdown in industrial activity in the medium term.

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The dipping pace of domestic manufacturing activity has been led in part by supply side constraints in key core sectors such as electricity and coal, which combined with the demand stress across other areas, has stymied the growth momentum.

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Elaborating on the slowdown in the mining sector, as reflected in the IIP (Index of Industrial Production) figures for November, Dr D.K. Pant, Associate Director at Fitch Ratings India, said: “There has been a dip in iron ore production due to the global slump in steel demand, which reflects in the mining output figures.

The waning demand from China, which has been a major steel and iron ore importer from India, is showing in the numbers. Besides, crude output has also been down.”

With capacity addition in the power sector also floundering, on account of both project execution delays and across-the-board fuel shortages, the cascading effect of electricity shortfall on the manufacturing sector has been debilitating, despite the ever-widening demand-supply mismatch situation in the sector. Electricity generation, with a weight of 10.17 per cent in the IIP, registered a growth of 2.6 per cent in November 2008 compared to a growth rate of 5.8 per cent the previous year. Electricity generation grew by 2.8 per cent during April-November 2008-09, compared to 7 per cent last year.

Coal provided the only silver lining, with production growing 9.6 per cent in November compared to a growth rate of 7.7 per cent in the same month in 2007.

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Besides, slowing economic growth and tighter lending by banks is cutting local demand, which coupled with the slowdown in key western economies hitting the export sectors, is hindering expansion plans across both the public sector and private sector firms.

“Plans to expand capacity have been put on hold by industries across most sectors, with much of RBI’s stimulus package actually finding its way into G-secs (investments going into government securities rather than funding expansion plans), as reflected in the negative capital goods growth,” Pant said.

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On the uptick

According to Goldman Sachs Global ECS Research, part of the uptick in November can also be explained by a low base in the previous year (in November 2007, industrial production had grown by only 4.9 per cent as compared to the average of 8.6 per cent in 2007-08). Also, despite the unexpected spurt in the IIP numbers in November, IIP growth has more than halved to average at 3.9 per cent during April-November 2008 as compared to 9.2 per cent during April-November 2007.

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According to Dun & Bradstreet India’s estimates, growth in industrial production is projected to be around 4.1 per cent for the current fiscal.

Given the slowing pace of the Indian economy and a significant moderation in the headline inflation, we expect a further cut in policy variables by the RBI in the forthcoming monetary policy,” stated Kaushal Sampat, COO, Dun & Bradstreet India.

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“However, the full effects of the monetary easing measures and fiscal stimulus package are expected to become apparent only in the second half of FY10,” he added.

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