Slowdown looms as factory growth slips

The country’s factory output, or industrial production growth, accelerated in September, as companies moved to build up stocks ahead of the festival season, which usually sees an increase in demand, but India appears set for an economic slowdown with factory output growth almost halving in the first six months of 2008-09 (April to September) compared with the same period last year.

Data released by the Central Statistical Organisation on Wednesday showed that during the first half of the year, the Index of Industrial Production (IIP) grew 4.9% compared with 9.5% in the year-ago period. In September, however, factory output grew 4.8% year-on-year, recovering from a 10-year low of 1.4% during August.

In September, Indian auto makers raised production to meet anticipated demand ahead of the festival of Diwali in October, considered an auspicious time to make purchases. Sales of automobiles, however, declined 14.4% in October compared with a year ago, as high borrowing costs and an uncertain economic environment kept consumers away.

September was also the month in which the global credit crisis intensified.

“We think the large, negative global and domestic financial sector shocks will continue to slow activity across the board in capex (capital expenditure) plans, exports growth and consumption demand,” Tushar Poddar, vice-president (Asia Economics Research) at Goldman Sachs, said in a statement. Goldman Sachs has revised its GDP growth forecast for India in 2008-09 to 6.7% from 7.5% and for 2009-10 to 5.8% from 7%. “We expect industry to grow by 4% year-on-year in 2008-09 from 8.1% in 2007-08,” he said.

The global financial crisis is curbing industrial output across Asia as a slowdown in the US and Europe crimps demand for the region’s exports. Industrial production in China grew 11.4% in September, the slowest pace in six years. Output in South Korea declined for a third month in a row.

India’s exports grew 15% from a year earlier in September, the slowest pace in 18 months.

India’s central bank has cut a key interest rate by 1.5 percentage points from 9% to 7.5% and lowered the amount lenders must keep with it or in liquid investments, freeing up as much as Rs1.4 trillion to ease lending. It, however, has also had to shore up the rupee, which fell 9.1% in the quarter ended September, thereby sucking this money out of the system (when the Reserve Bank of India, or RBI, sells dollars it takes out an equivalent amount in rupees from the system).

“Production growth will remain subdued until next year,” said Dharmakriti Joshi, an economist at Crisil Ltd, the local unit of Standard and Poor’s. “Interest rates need to be lowered to give a real boost to demand.”

Some state-run banks reduced lending rates after finance minister P. Chidambaram asked them to do so. State Bank of India, the country’s largest lender, cut the rate it charges its best clients to 13% last week from 13.75%, the highest in a decade. ICICI Bank Ltd, the country’s largest private lender, hasn’t reduced its 17.25% charge.

The cost of funds “remains very high” even after RBI lowered policy rates, said Bimal Jalan, a former central bank governor. “We need to create conditions so that loans are available at interest rates at pre-crisis levels, as other sources of finance have dried up.”

Apart from declining sales of automobiles in October and slowing exports, data released by India’s department of revenue on Tuesday showed a decline in indirect tax collections during the month.

Crisil’s Joshi said he expects October factory turnout numbers to be worse, because IIP in that month was high last year (that means it would have to be even higher this year to show any growth). IIP grew 12.2% last October.

As Mint reported on 5 November, India’s chief statistician Pronab Sen had said that economic growth could slow down to 7% in the July-September quarter on account of lower-than-expected industrial growth.

Chidambaram, however, termed the monthly recovery in industrial output “encouraging”. “After the poor results reported for the month of August 2008, the quick estimates of IIP for the month of September 2008 are more encouraging. I say this even while I maintain that data collection must be improved and made more relevant, contemporary and universal,” he said.

The Department of Industrial Policy and Promotion, which collects a large part of the data used to calculate IIP, recently hired economy and corporate tracker, Centre for Monitoring Indian Economy, to help accelerate the launch of a new IIP that is expected to be more representative and reliable.

Manufacturing, which accounts for nearly 80% of IIP, grew 4.8% in September compared with 7.4% in the same month a year ago. The capital goods sector recovered sharply during September to grow at 18.8% compared with 20.9% during the same period last year. In August, the capital goods sector had grown by 1%. Consumer durables grew at 13.1% in September, ahead of the festival season.

On Wednesday, the rising possibility of weaker-than-anticipated economic growth pushed the Bombay Stock Exchange’s benchmark index, the Sensex, down 303.36 points, or 3.1%, to 9,536.33.