It jumped in July but has seen less action in August. If there?s a message in the IIP number for August, which grew just 5.6% year-on-year, compared with 15.2% year-on-year in July, and came in a fair bit below the consensus estimates, it is that there?s reason not to be overly optimistic about India?s growth. There?s no cause to be too pessimistic either because, looked at over a longer period of between April and August this year, factory output has clocked a robust 10.6% while for the last three months the average is 8.8%. While the volatility is no doubt unnerving, the capital goods production number has always been known to be lumpy: from sub zero in June to 72% up year-on-year in July and a fall of 2.6% y-o-y in August 2010, the swings, as we?ve seen, can be large. Nonetheless, the contraction in the capital goods shocked the Sensex into a fall of 137 points; indeed it?s worrying that non-infrastructure spends don?t seem to picking up as expected. Since capital goods is one of the twin engines that?s supposed to be driving India?s growth, taking it past 8% or 9%, it needs to fire fast.
In fact, manufacturing, at 5.9%, as a whole has done poorly compared to the 16.7% seen in July and economists point out that the concern lies in the fact that labour-intensive segments seem to be lagging, though intermediate goods which have a fairly high weightage in the IIP, have done well to grow at 10%. The big surprise is the consumer non-durables space, mainly FMCG products, which has barely budged; the sector contracted in August by 1.2% after growing at just 2.1% between April and July. That?s bad news not only because it has a fairly big weight in the IIP at about five times that for consumer durables, but because it means high inflation is keeping people from spending more on staples.
JP Morgan?s chief economist Jahangir Aziz believes that there is a fairly high correlation between exports and the IIP and therefore, given that exports have been slowing down, it?s not surprising that the IIP too has lost some pace. Indeed, banks do not seem to have lent too much to companies and individuals so far this year; credit growth net of money loaned to buy telecom licences is up barely at 6-7%. It?s a fact though that there?s been a lot of short-term borrowing through Commercial Paper(CP) and companies are seeing cash flows. Nevertheless, economists who were looking at a GDP growth estimate, for 2010-11, of 8.5% and above, may want to revisit the number, or they may hope that the August IIP too will be revised upwards as was the case with the July index. The central bank, however, is unlikely to let the disappointing IIP data stand in its way of fighting inflation; the hawkish commentary may not come to an end do soon though because it?s high prices, driven partly by demand, that?s spooking the RBI rather than growth. Given that inflation is nowhere near the RBI?s target of 6% by March 2011?headline inflation in August moderated to 8.5% from 9.8% in July?key policy rates could well be hiked in early November.