Wake-up call

The Index of Industrial Production (IIP) numbers for June is an iteration of the fact that the slowdown on which the government has long been in denial is real and here to stay for some time to come.

Barring a meagre upshot of 0.1 per cent in April and a 2.5 per cent growth in May, IIP has fallen 2.7 per cent since March. Industrial output in the April-June quarter of the current fiscal contracted 0.1 per cent, against growth of 6.9 per cent a year ago. The contraction in the capital goods (29 per cent) and manufacturing sectors and lower offtake of non-durable goods will be primary causes of worry, for reviving demand in these sectors and calls for drastic policy measures.

 Manufacturing is still just 15 per cent of GDP output, according to Reserve Bank of India figures, far below Asian norms while services constitute close to 60 per cent. Indeed, kickstarting growth in these sectors will require quick reassurance for investors whose sentiments are largely negative right now, notwithstanding claims to the contrary made by numerous investor surveys.

Electricity generation in June retained its momentum with 8.8 per cent growth over 5.9 per cent in May, though with industrial output largely stagnant and manufacturing in the doldrums, it is pertinent to ask whether the benefits of higher power production have accrued to industry or if investor sentiment is picking up on the manufacturing front.

Last week’s power grid failure which disrupted power supply across much of northern and eastern India coupled with increasing pessimism among international rating agencies is cause for concern, and going by market information, more ratings cuts are likely in the coming months, especially if power generation too is impacted by the weak monsoon.

RBI had in its monetary policy last month fobbed off requests from industry for further rate cuts, but the case for improving liquidity and lowering cost of funds for banks and corporates has never been stronger. Bank credit to the industry, which picked up briefly in May after a hiatus, has slowed down since, bogged by low demand from the corporate and agriculture domains. Drought and delayed monsoons have exacerbated the dismal offtake of farm credit and banks have been concerned about deteriorating asset quality of corporates.

At the present rate, RBI’s revised GDP growth projection of 6.5 per cent for fiscal 2013, factoring in bottlenecks like the weak monsoon and slower industrial activity, looks mired in the prospect of even weaker growth, engendered by half-hearted government measures and weak policy responses.