Industrial production fiasco: Long haul to recovery

Updated: Oct 13 2014, 17:44pm hrs
Index of Industrial Production (IIP) numbers, notoriously difficult to predict and true to its character grew by just 0.4% (SBI at 2.8%) for Aug14. The disappointing number was driven by a significant downtick in both capital goods and consumer goods numbers.

The million dollar question, though remains when can we see an investment revival

In Q2 FY15, investment in new projects announced indicates that there was a reversal in trend, which was declining since Jun12. Our internal prognosis suggests that new project announcements may have a 2/3 quarter lead impact on Gross Fixed Capital Formation (GFCF).

The only possible downside to such an investment revival is that with most of the new project announcements happening in power and transport sectors, the lead impact may get prolonged, if the Government does not quickly go ahead and address the coal block allocation.

Going forward, the consumer non-durables sector growth may be impacted because of a poor monsoon.

The only silver lining is however the fact that Radio, TV & Communication sub-sector in manufacturing is pulling down the IIP growth to a significant extent. One possible reason for such is the closing down of one communication plant in Chennai.

Additionally, the sub-sector coke, refined petroleum products and nuclear fuel in manufacturing is also having an impact because of the shutdown of the Haldia Petro plant. But, both these needs to be viewed against an apparent slowdown in export demand (apparel and leather).

With global growth slowing down and the impact of radio component petering off, it may be a long haul to recovery.

Our Q2 FY15 GDP estimates are now trending at 5.2%-5.3%.

By Dr. Soumya Kanti Ghosh, Chief Economic Adviser, Economic Research Department, State Bank of India