That factory output for December would be somewhat muted was expected given the huge base effect; so at an increase of 1.6% year-on-year it wasn?t too disappointing although slightly below consensus estimates of a 2% rise.
On a month-on-month basis, growth in the IIP came in at just over 10%. The performance of the capital goods sector has varied widely from month to month and in December the segment fell nearly 14% dragging down the IIP. The manufacturing segment too was one of the victims of the high base effect; growth in December 2009 had been a strong19.6% year-on-year.
What the IIP number does is buttress the fact that there?s an industrial slowdown in the making and that investments need to pick up quickly so that the drift is arrested. As Rohini Malkani, economist at Citigroup India points out, from a three month moving average perspective, growth has decelerated to 5.5% from 9% a few months back and the double digit levels seen in early 2010-11.
Also, the CSO estimates put manufacturing growth at 8.8% for the year; since the growth in the first nine months has been just over 9% and there will be a downward bias in the remaining months, hitting 8.8% is not going to be easy.
All in all, while the economy is moving along, it?s more of a trot or a canter rather than a gallop.
What?s galloping right now is inflation; headline inflation for January, 2011, is expected to come in at a relatively high 8.3% on the back of an 8.4% number seen in December. Even if the rise in prices starts tapering off sometime in March, inflation is unlikely to fall below 6.5-7% during the rest of 2011. With that kind of scenario, the Reserve Bank of India (RBI) is likely to continue to keep monetary policy tight and hike policy rates; after all it?s evident now that a fair bit of the inflation is being driven by demand and not all of it is the result of supply shortages.
The RBI?s approach could continue to be a calibrated one in that the central bank will probably raise policy rates by 25 basis points in March and then again in May.
It?s true that higher interest rates typically do not hamper consumption or investment significantly but this time around, rates have risen rather sharply, especially at the shorter end where they are 300 basis points over the last six to eight months.
Moreover, liquidity is just about adequate. What could hold back managements from going ahead with capacity addition though is the uncertainty in the economy with high inflation threatening to stymie demand and the government dithering on project clearances.
Evidence was seen in the poor performance of the construction space in the December 2010 quarter and the fall in the order books of a couple of large engineering firms. The IIP contributes approximately about a fifth of the GDP so a moderating factory output number would drag it down. While Credit Suisse had come up with a GDP estimate of 7.7% for 2011-12 some time back, more recently Standard Chartered put out a forecast of 8.1%. It?s no surprise that investors are on the back foot.