IIP numbers call for an interest rate cut

Contraction in the manufacturing sector for the third consecutive month means that its growth in the first 10 months of the current financial year is now only 2.5 per cent -- less than half the growth rate notched up by it in the first seven months.

Industrial output in January, as captured by the Index of Industrial Production or IIP, declined by 1.5 per cent -- the third consecutive month of contraction.

This has dragged industrial output growth in the first ten months of the current financial year to 2.7 per cent, which is identical to that in the same period of 2014-15.

The fortunes of the industrial sector of the economy looked better in the first seven months of the current financial year.

Industrial output growth in April-October 2015 was 4.84 per cent compared to 2.2 per cent in the same period of 2014 and it had then looked as though an industrial recovery was on its way.

But the slide in the months of November, December and January has, quite worryingly, eroded all the gains made earlier in the current financial year.

Given the statistical base effect of the changes that took place in the IIP numbers in February and March of 2015, it is likely that the industrial growth rate in the remaining two months of the current financial year would see further volatility -- the growth rate for February could see a significant jump only to experience contraction in March.

But industrial growth for the full year 2015-16 notching a major recovery appears remote.

An increase in IIP of below three per cent would mean that industrial output has stayed tepid for the last five years, including one year that saw even a marginal decline.

On Saturday, Reserve Bank of India Governor Raghuram Rajan also echoed similar views expressing disappointment over the IIP numbers and noting the volatile nature of the recovery.

The IIP numbers for January have another disconcerting signal -- the manufacturing sector declined by 2.8 per cent.

Contraction in the manufacturing sector for the third consecutive month means that its growth in the first ten months of the current financial year is now only 2.5 per cent -- less than half the growth rate notched up by it in the first seven months.

While the electricity sector posted a decent growth rate at 6.6 per cent, there was no such buoyancy in the mining sector with a growth rate of only 1.2 per cent, belying expectations that the new auctions regime for the mining sector would help boost activity.

Demand deficiency was evident in the decline in the output of consumer non-durables by over three per cent and more disturbing is the marked deceleration in the growth rate for the consumer durables sector after a healthy rise seen in the previous months.

The absence of any recovery in investment is underlined by the capital goods sector, which contracted by a whopping 20.4 per cent in January.

For the April-January period of 2015-16, the capital goods sector was thus pulled down to show contraction of 0.6 per cent, a sharp reversal from the 5.8 per cent increase in the same period of 2014-15.

The implications of the lack of an industrial recovery, made worse by unmistakable signs of demand deficiency and weakness in investment activity, are serious with regard to the government’s challenges of macroeconomic management.

The Union Budget for 2016-17, presented two weeks ago, stayed firm on the promised path of fiscal consolidation, putting the onus on the RBI to consider steps to ease liquidity and reduce the interest rates.

As the IIP numbers of January show and the prognosis for the full year indicates, industrial growth remains a cause for concern and urgently requires a monetary policy push with lower interest rates.

If retail prices continue to remain benign, as is expected from data to be out on Monday, the RBI will find few reasons to postpone a rate cut in its next bi-monthly monetary policy review, early next month.

The image is used for representational purpose only. Photograph: Reuters