Industrial growth slows down to 7.1% in July, 2007
The Quick Estimates of Index of Industrial Production (IIP) for the month of July 2007 have been released by the Central Statistical Organisation of the Ministry of Statistics and Programme Implementation. The industry has grwon at 7.1% as compared to the level in the month of July 2006. This is the slowest IIP growth in the last eight months. A lower growth can be partly explained by a higher base effect. The cumulative growth for the period April-July 2007-08 stands at 9.6% over the corresponding period of the pervious year.
Alongwith the Quick Estimates of IIP for July 2007, the indices for June 2007 have undergone the first revision and those for April 2007 have undergone the second (final) revision in the light of the updated data received from the source agencies. Even, industrial growth figures for June ‘07 has been revised downwards to 9% this month as against the initial estimate of 9.8% growth.
The adverse effects of rising interest rates and tight monetary policy are evident. Higher rates affected sectors such as automobile and housing the most. As a result production of machinery and transport equipment and non-metallic products which has cement as a major item slowed down. Small sectors like jute and jute products, wood and wood products along with basic metals have recorded outstanding growth in the range of 16-22 %. Besides, power generation rose 7.% on top of a 8.9% growth in July 06.
In terms of industries, as many as thirteen (13) out of the seventeen (17) industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of July 2007 as compared to the corresponding month of the previous year. The industry group ‘Wood and Wood Products; Furniture and Fixtures’ have shown the highest growth of 21.1%, followed by 17.5% in ‘Basic Metal and Alloy Industries’ and 16.1% in ‘Jute and other Vegetable Fibre Textiles (except cotton)’. On the other hand, the industry group ‘Metal Products and Parts, except Machinery and Equipment’ have shown a negative growth of 5.1% followed by 4.6% in ‘Paper & Paper Products and printing, Publishing & Allied Industries’ and 4.1% in ‘Food products’.
As per used-based classification, the impact of interest rate is visible in many sectors. Decceleration in capital goods production in the initial months of FY08 has put a pause button on the five-years rally. Moreover, there is a sharp moderation in intermediate goods to 4.7% as against a growth of 10.7% a year ago. Slowdown in investment activity coupled with a lower intake of raw material reflects a moderation in industrial activity so far this year. Whether the latest figures are just an aberration or a beginning of a southward trend remains to be seen.
As per used-based classification, the impact of interest rate is visible in many sectors. Decceleration in capital goods production in the initial months of FY08 has put a pause button on the five-years rally. Moreover, there is a sharp moderation in intermediate goods to 4.7% as against a growth of 10.7% a year ago. Slowdown in investment activity coupled with a lower intake of raw material reflects a moderation in industrial activity so far this year. Whether the latest figures are just an aberration or a beginning of a southward trend remains to be seen.
Going forward demand will influence the trend. A 3.2% fall in production of consumer durables this month deepened the existing trend in consumption slowdown. Things could look up a little with the festival season demand. But, this could be short-term . Later on, liquidity position, outlook on inflation and Reserve Bank’s measures to deal with the evolving situation will set the tone of consumption demand for the rest of the year.
On investment demand front, the existing situation is not very encouraging . Higher domestic interest rates, steep rise in overseas rates on account of liquidity crunch arising out of sub-prime crisis and a cap on foreign loans may play a spoilsport.
As in April and May, it is the significant variation in growth across industries that is a primary feature of the numbers and raises questions about momentum and sustainability. In both April and May, by far the fastest growing industry was wood and wood products, not at all significant in the overall basket but contributing disproportionately to the growth during the quarter. June was a third spectacular month for this industry - it grew by over 103 per cent over June 2006 and by over 104 per cent during the quarter. One could imagine that all the real estate that has been developed in recent months, be it residential or commercial, needs to be decorated and furnished, leading to a surge in demand for the products of this industry, but, even then the numbers are staggering. The other industry which performed exceedingly well is food products. Though it moderated considerably during June, growing at only 1.3 per cent, it notched a growth rate of over 27 per cent during the quarter. This was on the back of 55 per cent growth during April. If it hadn't been for these two industries accelerating so sharply, overall growth would have been far less buoyant.
