Even if one attributes a part of the fall in the factory output in October to the fewer number of production days, given it was a festive month, the sharp 4.2% contraction puts IIP growth at the lowest since October 2011. It also adds to pressure on RBI to cut interest rates since, at 4.4%, CPI inflation for the month was the lowest since the series began in January 2012.
Auto manufacturers, for instance, would have done some amount of de-stocking in October after loading up on inventories in September and the same could be true for manufacturers of other durables. There were, of course, the usual one-off events, apart from the overall slowing of exports. The 70% contraction in the radio/TV/communication category, accentuated by the Nokia closure—and higher TV imports—adds up to a 0.7 percentage point fall in the IIP.
There are other such examples like gems and jewellery where the 50% contraction would have shaved off another 0.8 percentage points from the IIP. As for the 22% fall in cigarettes and 41% in antibiotics, it is difficult to explain this as anything but a data glitch. To that extent, it is possible to argue the October data is just an outlier—IIP has been directionally positive, and has averaged 2.8% in the first half of FY15—more so since the automobile numbers for November were up 12.4% year-on-year, and cement volumes were also up in November.
Nonetheless, the overall trend remains disappointing and IIP growth has been greater than 3% in just 5 of the last 24 months. Capital goods have been erratic and, after rising 11.6% in September, contracted 2.5% in October, and the order books at leading engineering firms don’t suggest any rebound. The more compelling evidence in this context is the subdued loan growth, averaging just about 11-12% and the commentary of bankers who say the pipeline of projects continues to be nearly empty. Indeed, after coming off by 32% in FY14, project sanctions are yet to pick up meaningfully as there is adequate capacity to take care of near-term demand, and because manufacturers aren’t confident about demand over the longer term.
While many have argued that a rate cut will not help bring back investment demand, which is driven more by capacity utilisation levels as well as future growth prospects both locally as well as globally, the same cannot be said about consumer demand which remains very sensitive to rates of interest. While RBI Governor Raghuram Rajan is unlikely to take any measures in a hurry—the RBI view is that inflation rates will start rising in December—there is no doubt the pressure on him to cut rates has just gone up that much after yesterday’s data which showed a 35% fall in consumer durables, the worst performance since the series began.
