FM counter IIP growth data

Even as the government data today showed that India’s industrial production growth expanded the slowest in 10 years at 1.3 per cent this August, Finance Minister P Chidambaram expressed doubts over the data and said some features of the latest numbers appear to be out of line. Data released by the Central Statistical Organisation today showed that the Index of Industrial Production (IIP) growth rate in August is the second lowest seen in the monthly index since October 1998, when growth remained flat. Manufacturing sector production expanded the slowest in 10 years this August, at just 1.1 per cent (see chart), pulling down the overall growth in the index. Within manufacturing, intermediate goods production in August was 6.2 per cent lower than the same month last year. Some analysts feel that lower sales of vehicles, two-wheelers as well as the slowdown in the real estate sector, is responsible for the decline in production of intermediate goods, which includes paints and tyres. Capital goods production during the same month expanded only 2.3 per cent, compared to 31 per cent in the same month previous year. However, consumer goods, which account for over 28 per cent in the index, posted a healthy 5.1 per cent growth as against no growth in the same month last year. The data also showed that the production growth of textile items like cotton textiles, wool and man-made fibres, and ready-made garments dipped compared to the same month last year. Moreover, the production growth of basic chemicals and other chemical products also declined by 0.7 per cent in August over the same month last year. Significantly, production in the auto and auto components sector expanded by 11 per cent in the same month over the year ago period. The weak expansion of the IIP in August was reflected in the index of six core infrastructure industries (see chart). This was mainly because electricity generation in power plants across the country was almost stagnant compared to the same month last year. Moreover, cement production increased by only 2 per cent, due to decrease in demand due to the monsoon season. Other economists said the data may be a bit “exaggerated”. On his part, Commerce Minister Kamal Nath said the IIP is being reviewed. Accepting that the IIP numbers may not be reflecting current economic reality, Nath said: “The IIP is based on a 1993-94 base year. It does not reflect the dynamic economy. We are reviewing this. We are not seeing any closures. I will only tell industry that it is good to be cautious and let there be no gloom.” Soon after the IIP data was made public, Chidambaram told a television channel that he had conveyed his concerns over the data a couple of months ago to the department of industrial policy and promotion. “I have told them again today. In fact, an independent economist has pointed out to me that at least two to three features of the current IIP (data) are quite out of line with any kind of calculations. On the intermediate goods, it does not sound right at all. So the numbers have to be looked into more carefully”, he said. He added that it is too early to assess the impact of the latest IIP numbers on the economy. “I am confident that our economy will still grow at a very satisfactory rate,” he added. Independent economists expressed similar views. “There is a serious problem in the data. It does not support other evidence on the state of the Indian economy. In worst scenario, the growth should have been in the range of 4.5 to 5 per cent. Inadequate data reportage causes unnecessary panic,” said Abheek Barua, chief economist, HDFC Bank. Barua believes that had the industrial production growth increased to the extent reported in today’s numbers, bank credit in the period would have collapsed. According to Tushar Poddar, vice-president (Asia Economics Research), Goldman Sachs, the latest IIP numbers exaggerate the extent of the industrial slowdown. “Although growth is slowing, it is important to put the industrial production number into context. Other macro-indicators such as direct taxes, money supply, non-oil imports and credit growth have all been robust in the April-August period,” he said in a report. But other economists say the latest numbers indeed point towards an economic slowdown. “There is a slowdown and we should recognise this. The IIP growth rate in August is mainly because of a double whammy resulting out of a large base effect as well as the slowdown in the economy resulting out of high interest rates amongst other factors,” said Saugata Bhattacharya, vice-president, Axis Bank. One of the indicators of a slowdown in the industrial production growth was the near flat growth in excise collections in August, which expanded 1.2 per cent to Rs 10,013 crore, from Rs 9,898 crore in the same month last year. Moreover, passenger car sales posted an annual decline of 4.4 per cent in the month.