India’s industrial production slumped by 3.5% in March for the first time in five months,as manufacturing,mining and capital goods contracted,exerting further pressure on the central bank for monetary easing to prop up the weakening economy.
The Index of Industrial Production (IIP) had surged 9.4% in March last year,driving up the base for IIP calculations for March this year. The industrial production has risen at a sluggish 2.8% in the fiscal year through March 12,compared with 8.2% in the previous fiscal,showed official data released on Friday.
Production in the the manufacturing sector,which accounts for around 75% of the industrial output,fell 4.4% in March,compared with a whopping 11% expansion a year before. Mining,too,declined 1.3% against the growth of 0.4%. Capital goods output,an indicator of investment in the economy,slumped 21.3%,compared with 14.5% expansion during the review period.
Consumer goods grew by a meagre 0.7% in March,compared with an impressive 13.2% a year before. Similarly,consumer durables output gained 0.2% against 14.9%growth in the same month last year. Power generation grew 2.7%,compared with 7.2% a year earlier.
“This (IIP) data is combined with persistence of inflation,and there is not much scope for aggressive rate cuts. I do not expect more than 25 basis points cut in rates in the rest of the year,” said Rupa Rege Nitsure,chief economist at Bank Of Baroda.
However,citing “upside risk” to inflation,the RBI last month warned about limited scope for further monetary easing after pruning the main lending rate the repo rate after three years by a sharper-than-expected 50 basis points to 8% to boost sagging growth. Headline inflation showed signs of moderation since December although it still stayed at 6.89%,beyond the comfort level of the Reserve Bank Of India and the government.
Analysts say mere rate cuts won’t solve the problem,as reforms in important sectors hold the key to any revival in the economy.
In a surprising reaction to the dip in the index of industrial production for March 2012,Commerce and Industry Minister,Anand Sharma has asked RBI to provide a differential rate of credit for manufacturing,given that there is a huge social dimension attached with the manufacturing sector which he said supports millions of jobs.
Expressing deep concern over the decline in the index especially in capital goods and manufacturing,he has pressed for availability of credit at affordable rates for domestic industry and dollar credit for Indian exporters.
The commerce ministry has on many occasions asked for differential credit for exporters but the demand for manufacturing is novel. The sector accounts for 16% of the Indian GDP.
Sharma said the slow down in exports growth in April in the backdrop of the economic crisis in the Euro Zone is a worrisome development.
The data is much weaker than expected. Don’t forget the concentration in capital goods,that is where the volatility is. And the industrial production data is at odds with the Purchasing Managers’ Index,maybe the actual reality lies somewhere in between the two. Don’t forget the slowdown and the drivers of inflation are different.
The government needs to wake up and do something sensible for investments.
We expect softness in the economy’s manufacturing sector to persist in the coming months,though the decline in March IIP was exaggerated by base effects.
Below consensus IIP print,however,will not prompt the RBI to loosen monetary levers further in June,while Monday’s WPI number will be more keenly watched especially in light of the rupee’s recent stark depreciation.
DARIUSZ KOWALCZYK,ECONOMIST,CREDIT AGRICOLE CIB,HONG KONG
The contraction was driven by particularly poor performance of the manufacturing sector,in line with weak exports that month.
We believe that April saw a turnaround,but until this is confirmed,sentiment will be weak. The data increases the odds of another rate cut,is negative for the INR,and should push INR OIS rates and bond yields down.
A PRASANNA,ECONOMIST,ICICI SECURITIES PRIMARY DEALERSHIP,MUMBAI
The sober conclusion we draw from the trend in December quarter and March quarter is there is no improvement,though we thought we will see some recovery. Underlying demand has weakened and banks’ rate cuts will impact project finance cost only after September.
The probability of rate cut now increases,but a lot depends on inflation and on whether government raises oil prices. I don’t think RBI will cut rates unless subsidies are brought down. We expect rate cuts only in the second half (after September).
ARUN SINGH,SENIOR ECONOMIST,DUN & BRADSTREET,MUMBAI
Concern over economic growth has increased after the dismal IIP data,and it should prompt the RBI to go for further reduction in interest rates from June. I see another 100 basis points cut in the repo rate by March 2013.
RUPA REGE NITSURE,CHIEF ECONOMIST,BANK OF BARODA,MUMBAI
The same depressing trend continues,in line with other data like the core industrial output and export data. But this data is combined with persistence of inflation,and there is not much scope for aggressive rate cuts. I do not expect more than 25 basis points cut in rates in the rest of the year.
SIDDHARTHA SANYAL,CHIEF INDIA ECONOMIST,BARCLAYS CAPITAL,MUMBAI
I don’t think just one data point,and that too IIP,will change the RBI (Reserve Bank of India) policy stance. But we are of the view that incrementally RBI will have to cut rates more and sound dovish. RBI will have a bias to not cut rates till July,but may have to start after that. We expect another 50-75 basis points rate cut in this year.
SAUGATA BHATTACHARYA,ECONOMIST,AXIS BANK,MUMBAI
The IIP (index of industrial production) number will not lead to a knee-jerk reaction from the Reserve Bank of India. I don’t think there will be a reduction in interest rates in June.
They will wait for other indicators like inflation,and also the global crude oil prices and reform measures taken by the government before deciding on rate cuts.
NIRAV DALAL,MANAGING DIRECTOR AND COUNTRY HEAD-FIXED INCOME AND DEBT CAPITAL MARKETS,YES BANK,MUMBAI
There is a lot of noise in the industrial production data,but having said that a negative number is not something you can ignore. The number has added significance in the current uncertain global environment.
The bond market is waiting for new securities,and for liquidity to stabilise. The direction for yields will be lower,but it will be a slow move. I expect the 10-year yield to be in 8.25-8.50 percent over the next one month.
SUJAN HAJRA,CHIEF ECONOMIST,ANAND RATHI SECURITIES,MUMBAI
We still expect a rebound in industrial production in the fiscal second half and expect the full year number to be about 5 percent.
RBI’s near-term rate outlook will still be driven by the inflation trajectory. They may instead infuse liquidity going ahead through open market operations and cash reserve ratio cuts during June-September.
The benchmark stock index extended its fall to 0.9 percent after the data,while the rupee dropped to an intraday low of 53.61 to the dollar.
The 10-year bond yield fell 2 basis points to 8.54 percent.
– India’s economy probably expanded 6.9 percent in the 2011/12 fiscal year that ended in March,its slowest pace in three years.
– The central bank,which cut interest rates in April for the first time in three years,has forecast growth at 7.3 percent in 2012/13.
– Expansion in manufacturing sector picked up pace in April,supported by bulging order books,but slower output growth and increasing price pressures dampened sentiment,a business survey showed.
– Growth in the Indian services sector accelerated a touch in April thanks to a rise in new business,and optimism hit its highest level since June 2011,a survey showed last week.
– Headline inflation slowed marginally to 6.89 percent in March helped by a softening in prices of manufactured goods,even as food inflation shot up. Analysts expect April inflation at 6.70 percent.
– The Reserve Bank of India slashed its main lending rate – the repo rate – by a sharper-than-expected 50 basis points in April to help revive growth.