As factory output shrinks, India Inc. demands lower interest rates
India's industrial output contracted to minus -5.1 percent in October according to data released Monday, slipping more than expected and sparking off fears of a further slowdown in the economy. India Inc. responded by asking policymakers to incentivise investment and ease interest rates.
Growth in factory output, measured in terms of the Index of Industrial Production (IIP), was logged at 11.3 percent in October 2010-11.
Industrial production has been sluggish now for more than a quarter, with industry blaming high interest rates, which shot up after successive rate hikes by the Reserve Bank of India (RBI), and a slowdown in overall investment activity because of uncertainty in the global economy. In the month under review, manufacturing output slumped into the negative, with a growth of minus-6 percent, while mining activity declined to (-) 7.2 percent. During the month under review, electricity output was the only positive news, registering growth of 5.6 percent.
"The manufacturing growth in India has now reached crisis level. The situation is likely to worsen further as predicted by latest FICCI manufacturing survey," said Rajiv Kumar, secretary general, Federation of Indian Chambers of Commerce and Industry (FICCI).
According to FICCI's survey, 87 percent of the 384 manufacturing units said they expect growth to moderate in the third quarter of 2011-12 . "RBI should immediately bring down the interest rates so as to stimulate investments and revive consumer durable demand. Also, it is high time that government reintroduces investment allowance and restores the fiscal stimulus by making the necessary fiscal space," added Kumar.
The IIP for September 2011 was revised marginally upwards to 2 percent, according to data released by the ministry of statistics and programme implementation. In July, IIP registered a 3.8 percent increase and nudged up further to 4.1 percent in August.
Policmakers expressed concern on the falling industrial output. "I don't have a gameplan for it but we recognise that we have to take a holistic look at all aspects of the situation that may be constraining investment," Planning Commission Deputy Chairman Montek Singh Ahluwalia told reporters while reacting to the data.
The poor IIP figures had a negative impact on equity market sentiments. The 30-scrip sensitive index (Sensex) of the Bombay Stock Exchange closed over 343 points lower.
"While all sectors have fallen in October, the sharp decline in the capital goods sector is of particular concern, as it indicates a lack of investments, which will continue to be a drag on growth. The continued decline in the mining sector indicates the problems created by the closure of mines," said Chandrajit Banerjee, director general of the Confederation of Indian Industry (CII). "Urgent measures are required to induce investments, including creating a shelf of bankable projects - particularly in infrastructure in the country, gradual roll-back of interest rate increases, improve the fiscal situation - which in turn would help ease the effective rate of interest," Banerjee added.
For the April-October period in the current fiscal, the IIP has increased by just 3.5 percent, compared to 8.7 percent in the previous comparable period. Manufacturing sector, which constitutes over three-fourths of the IIP index, registered cumulative growth of only 3.7 percent in April-October period, while the mining sector's cumulative production fell by 2.2 percent in the first seven months of 2011-12.