Industrial growth hits pothole again

India’s industrial growth story appears to be losing steam. For the second month in a row, the index of industrial production (IIP) for September, 2010, showed a drop over the corresponding month of the previous year.

The index for September fell to a 16-month low of 4.4% compared to 8.2% a year ago. In August, the IIP grew 6.9%, far slower than the previous year’s 10.4%.

The weakening of industrial growth has raised concerns all around, from the finance ministry down to the stock and currency markets. “We will have to analyse why that is happening. And after that, considered comments can be made. But it’s a matter of concern,” finance minister Pranab Mukherjee told newspersons.

 The Bombay stock exchange Sensex crashed 432 points to 20,157, and the rupee tanked by 49 paise against the US dollar to 44.80.

Expectations of fresh capital outflows following the weakness in local equities and fears of a monetary tightening by China due to an overheating economy put pressure on the rupee.

The villain in the IIP flow show was capital goods — machinery used to manufacture other goods — which actually declined by 4.2% in September. Even in August, capital goods had shown a fall of 2.6% against a whopping jump of 63% in July, 2010.

“This implies that companies are not investing enough despite constraints in capacity, as they don’t expect demand to be strong,” said Robert-Prior Wandesforde, head of India and South Asia Economics at Credit Suisse. “But we have to be careful about reading too much into the data,” he said.

There is no compelling evidence to suggest that industrial production is capitulating in a big way, Vishnu Varathan, an economist at Capital Economics Ltd in Singapore, told Bloomberg. “There is no reason to be overly pessimistic.”

Manufacturing output, which accounts for nearly 80% of the total weight of the IIP, grew 4.5% in September compared with 7.5% in August and 8.3% a year ago. Mining and electricity grew 5.3% and 1.7%, respectively, in September.

October should see a revival, feel most economists, thanks to festival demand. “We had seen a slump in the Purchasing Managers’ Index as well as negative growth in coal and power generation in September, 2010. I am sure growth numbers will be much better for October, 2010, due to the festive season and positive leading indicators,” said Rupa Rege Nitsure, chief economist of Bank of Baroda.

Though analysts are paring their IIP growth forecast for the full fiscal, it may not come in the way of the economy attaining 8.5% growth in 2010-11. “Our expectation does not indicate any fundamental deterioration in Indian industry,” said Sujan Hajra, chief economist at Anand Rathi Securities.

The good news: if industrial growth continues to stay weak, interest rates will not rise further till March.