March is typically the month where industrial production spikes, as firms try to ratchet up sales and thus production, as they near the close of the accounting year.
The buoyancy is missing this time around, with a 3.5 per cent contraction in the Index of Industrial Production (IIP) in March 2012 compared with a year ago. In the last five years, barring March 2009 (when it contracted), the IIP expanded anywhere between 9.5-15 per cent in the month of March.
However, there were advance indications of this weakness. The index for Eight Core Industries, released a while ago and a leading indicator for production activity, expanded by just 2 per cent in March over a year ago.
Whither GDP growth?
The decline in IIP puts further pressure on the GDP growth estimates for FY-12. Manufacturing, mining and quarrying and electricity – all representing various industrial sectors- accounted for a little less than a fifth of the GDP for the nine months ended December 2011.
With the latest numbers, the average IIP for the March quarter stood at 179.7, almost same as the March 2011 quarter. This could pose a challenge to the advance estimate GDP growth of 6.9 per cent for this fiscal.
What caused the damage
Production expanded by a meagre 2.8 per cent in 2011-12, after 8.2-percent growth in 2010-11.
What segments pulled down growth in the current fiscal? It was capital goods as well as consumer durables. While consumer durable production was just 2.5 per cent higher, capital goods output fell. These sectors grew in double digits in 2010-11.
Machinery and equipment as well as electrical machinery which witnessed robust growth in FY-11 saw a dip this year. This implies that the revival seen in the capital goods segments in early 2011 turned out to be short-lived, with new projects either delayed or curtailed.
In the consumer durables space, both sluggish demand and higher input prices hit manufacturers. The proof lies in their shrinking profit margins.
What lies ahead
The April month's HSBC Markit India Manufacturing Purchasing Managers' Index (PMI), though still growing, hints at a frustratingly slow uptick in production. '
This is accompanied by a rising output price index, suggesting higher cost of input prices being passed on. Both point to the risk of higher inflation.
That effectively reduces scope for the RBI to resort to further rate cuts in the near term.
vidya@thehindu.co.in