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Industry: India's core infra growth slows to 9.6%

	May 19, 2008

Driven by finished steel and cement production, core infrastructure industries grew by a healthy 9.6 per cent in March 2008, although overall growth of industry was a mere three per cent in the same month.



Even though the growth of six core industries- crude oil, cement, electricity, coal, petroleum refinery products and finished steel - in March this year was less than the 10.5 per cent a year ago, it was encouraging, given the dismal industrial growth.



So far as the whole of 2007-08 is concerned, growth in these six areas declined to 5.6 per cent in fiscal 2007-08 from 9.2 per cent in the previous year.



In March 2008, three of the six core industries, however, performed badly as crude oil production declined by 0.3 per cent, petroleum refinery output remained stagnant and electricity generation grew by just 3.6 per cent in March compared to eight per cent a year ago.



It was mainly finished steel and cement, which pushed up the growth of six infrastructure industries in March. Finished steel production grew by 21.8 per cent from 16.6 per cent, while cement output rose by 9.3 per cent from 5.5 per cent.



Coal production growth dipped by 9.3 per cent from 10.6 per cent during the month.

HDFC Bank Chief Economist Abheek Barua said, "The growth in core industries will partially offset the negative sentiment built around the IIP".



However, the overall performance is skewed toward just two sectors - cement and steel, he said, adding that this reflects the chronic problem that should be addressed.



Measures like cut in interest rates offer a temporary solution, Barua said, pointing out that there are problems of funding and policy in these sectors which hopefully will get addressed.



The 9.6 per cent growth in six core industries in March was the highest throughout financial year 2007-08. Before this, these industries grew by 8.9 per cent in August 2007.

The six core industries have a 26.7 per cent weight in the Index of Industrial Production (IIP), which measures industrial growth.



It meant that it was basically areas like crude, petroleum refinery products, electricity and other sectors such as consumer durable goods that dragged down industrial growth in March. For fiscal 2007-08, all six industries put up a poor performance and registered slowdown in growth. While crude oil production grew by a mere 0.4 per cent last fiscal from 5.6 per cent, growth in petroleum refinery production was a slower 6.5 per cent, compared to a healthy 12.9 per cent in 2006-07.



Coal production was up marginally by 6 per cent from 5.9 per cent during the period under review. Electricity and cement output grew a per cent less from 7.3 per cent and 9.1 per cent respectively in 2006-07.



Finished steel production in 2007-08 registered a growth of 5.1 per cent, down from 13.1 per cent a year ago. In absolute terms, crude oil production stood at 2.92 million tons in March 2008, down from 2.93 million tons a year ago. Petroleum refinery output remained more or less stagnant at 12.5 million tons.



Coal production in March was 52.97 million tons as against 48.46 million tons, while electricity generation was 61223 GwH compared to 59075 GwH.



Finished steel production, which registered the highest growth of 21.8 per cent, stood at 6.10 million tons in March from 5 million tons a year ago. Cement output was 16.89 million tons as against 15.45 million tons in March 2007.



In March 2008, it was finished steel which led the pack by registering 21.8% growth compared to 16.6% in March 2007. For the whole year though, finished steel production, with a weightage of 5.13% in the IIP, grew by a modest 5.1% compared to an increase of 13.1% during the same period of 2006-07.



Cement output, with a relatively small weight of 1.99% in the IIP, increased by 9.3% during March 2008 compared to 5.5% in the same month of the previous fiscal. Production grew by 8.1% during April-March 2007-08 compared to an increase of 9.1% during the same period of 2006-07.



Coal production, with a weight of 3.2% in the IIP, grew 9.3% in March 2008 compared to 10.6% in March 2007. Coal production grew by 6.0% during 2007-08 compared to an increase of 5.9% during the previous fiscal.



Signs of a slowdown: With inflation numbers indicating that the rate had risen to a near-four-year high of unacceptable levels, last Monday's announcement of the Index of Industrial Production (IIP) numbers for March 2008 added to the pall of gloom rapidly spreading over the economy. The general index grew by a meagre 3 per cent during the month, taking its growth for the financial year 2007-08 to 8.1 per cent, the lowest in six years. Manufacturing, the most important component of the index, grew by an even lower rate of 2.9 per cent in March, partly due to the very high base of 16 per cent growth last March, but clearly that is not the only reason.



For the entire year 2007-08, the growth rate is estimated to be 8.13 per cent, more than 3 percentage points below the previous year’s figure of 11.6 per cent. Though the Planning Commission has maintained that industrial growth being at the lower end of the anticipated band of 8-8.5 per cent was entirely expected, the drop in the rate has several negative connotations for the macro-economy. In the recent past, strong performances by both industry and services had made possible a GDP growth of 9 per cent. The decline in industrial growth will most likely cause a downward revision in official GDP estimates for 2007-08. In its advance estimates, the CSO had placed the GDP growth at 8.7 per cent. Obviously the scaling down of estimates for 2007-08 will influence the prognosis for the current year as well. The RBI’s forecast of 8 to 8.5 per cent growth seems optimistic in this context. Most other professional forecasters have been less upbeat. Their caution seems to be corroborated by the news of a perceptible decline in the rate of growth in six core infrastructure industries, including coal, electricity, and petroleum refinery products.



The main contributor to the manufacturing slowdown was a decline of over 25 per cent in metal products and parts. Since these numbers reflect the performance of the industry before all the recent price and trade restrictions came into force, they point to the unmistakable fact that demand has been shrinking in response to high prices. Transport equipment, a metal-intensive sector, also showed a decline, but not nearly by as much. By contrast, machinery and equipment, also metal-intensive, grew by 6 per cent during March, taking its growth rate for the year to 9.3 per cent. These numbers provide some reassurance that, despite the short-term adversity, investment activity continues, validating a more optimistic long-term view of economic prospects. Of course, the slowdown is not confined to metal-related sectors. Textiles and garments also declined during March, suggesting that the global slowdown is taking its toll. The exchange rate stabilised during this period, indicating that the slowdown had more to do with sluggish demand than currency movements. Chemicals, another heavyweight sector, also performed poorly, growing at barely over 1 per cent in March. Overall, these numbers confirm the perceptions of a sharp slowdown and, viewed in conjunction with the inflation numbers, raise the spectre of stagflation.



Stagflation is extremely difficult for conventional policy instruments to deal with, since the attempt to deal with any one of the problems tends to exacerbate the other. The appropriate policy response depends on what the immediate future holds for either of these indicators in terms of factors that could spontaneously bring about a favourable change. From this perspective, inflation is the most likely to abate in coming weeks, as food prices respond to both trade restrictions and expectations of a decent monsoon.



While the supply response for metals will take much longer, the sharp response of demand to higher prices suggests that slower growth will contribute significantly to lowering prices. Of course, we cannot overlook the huge chasm that has emerged between international oil prices and the domestic prices of key products. Since no one is betting on oil prices going down any time soon, the only option available to the government if it wants to avoid a fiscal blow-out is to use every moderation in the inflation rate to make a small adjustment to the retail prices of these products.



There are inherent limitations in extrapolating past data related to a specific month or even a whole year to arrive at meaningful conclusions on the state of the economy. For instance, in March 2007, the base month for the latest IIP figures, the rate of growth was as high as 14.8 per cent. The steep fall a year later might well seem to be an aberration. However, some of the factors responsible for the latest industrial slowdown such as high interest rates and escalating raw material and input costs will remain over the medium-term. Thus a sharp rebound in industrial growth seems unlikely for now. Moreover, with WPI inflation touching 7.83 per cent for the week ending with May 3, there is going to be no let-up in monetary tightening. In another context, a softer monetary stance could possibly have been used to reverse the industrial slowdown but now it will only stoke inflationary expectations and is therefore ruled out. Global oil prices continue to rule at record highs. The government is faced with a mounting subsidy bill. The rupee, which had appreciated sharply, has recently come down in relation to the dollar. Evidently, it will be hazardous to judge the performance of the economy as a whole from projections of past data, given the uncertainty and the new factors that seem to be at work.

Meanwhile, assuming that the outlook for inflation is relatively favourable, policy responses can focus on how to keep growth from sliding too far below the healthy trend that has been established over the last few years. Short-term measures, such as ensuring that the budgetary allocations to various sectors are actually spent, need to be combined with much-awaited reforms that will reinforce the longer-term growth momentum.