The 6.4 per cent year-on-year outturn compared with the market expectations of a 9.2 per cent rise was the weakest since the Diwali distorted numbers of October last year. It is the second lowest outturn since December 2005 and again hints that industrial activity is not quite as robust as most would have us believe.
No doubt the numbers will again give rise to suggestions that output is being under-recorded and for all we know that may be true. But for the moment, at least, the series is the best we have to work with.
It also seems sensible to expect some sort of downturn given that the strength of the rupee is eating into profit margins, while the interest rate hikes may be starting to impact (although we think the main effects won't be felt until well into 2008 given the lags with which rates typically operate).
There are several other points to make: Looking at the three month moving average of the year-on-year growth rate, as an indication of the underlying trend, output growth fell to 8.2 per cent compared to a high of 13.6 per cent at the beginning of the year.
This doesn't bode well for the third quarter GDP, although the relationship between the two series is far from perfect. The breakdown of the release showed significant slippage in each of the three main components of industrial production, with mining down to 6 per cent after an extraordinary 17.1 per cent in the previous month, electricity down to just 4.5 per cent and manufacturing at 6.6 per cent.
Consumer goods production actually contracted (0.6 per cent) in the year to September. This is only the second decline since October 1998 and reflects weakness in motor vehicle production (an early interest rate effect?) as well as telephones and TVs according to RBI's recent statement. Within consumer goods, durables fell 7.6 per cent.
Basic goods grew 6.7 per cent, with intermediate up 9.3 per cent. The silver lining is that the production of capital goods continues to soar, rising 18.6 per cent in September and pointing to ongoing strong investment spending. Assuming the capital spending is going to the right areas, this is exactly what the country needs to remove the bottlenecks so evident in surveys of capacity utilisation.
With Diwali falling slightly later this year than last, year-on-year industrial production growth will rebound strongly in October but will then slow again in November.
Robert Prior-Wandesforde is a Singapore-based economist with the Hongkong and Shanghai Banking Corporation.
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