"We will have to analyze why that is happening. And after that considered comments can be made. But it's a matter of concern," said a worried finance minister Pranab Mukerjee as figures released on Industrial growth last week, reflected its sharpest decline in 16 months. In fact it has almost halved from the 8.2% of September 2009 to a mere 4.4% as of September of this year.
What it reflects is a slowdown in demand across most sectors. Manufacturing, which constitutes almost 80 per cent of the industrial production was hard hit and grew at just 4.5 % as against 8.3 per cent a year ago, while electricity generation expanded by a miniscule 1.7 per cent against 7.5 per cent. Primarily, the cause of this slump in growth is being attributed as a response to RBI's tight monetary policy over the past many months and the rise in interest rates that has become the consequence thereof.
Incidentally, we have witnessed six rate hikes this year, the last being in the first week of November, when the RBI hiked its key short-term lending and borrowing rates by 25 basis points each to rein in inflation. Accordingly, the short term lending rate or (repo rate) now stands at 6.25 per cent and the borrowing rate (reverse repo) at 5.25 per cent.
But are the growth figures actually disappointing and is there serious cause for concern? The stock markets crashed on Friday as the numbers became public.
In my opinion just one set of numbers do not reflect the true picture. And most economists agree. Says Dr. Arun Singh, Senior Economist at Dun & Bradstreet Information Services India, “The lower IIP number at 4.4%, though below our expectations, should not be a cause of concern as it is partly the reflection of change in the base of IIP series from 1993-94 to 2004-05. Moreover, the high base of the previous year has also played a role in dragging the IIP numbers down. Capital goods production has witnessed a y-o-y decline of 4.2% during Sep-10 pulling down growth in overall IIP by almost 7.7%.”
And his argument is based on validated logic. According to him “if we take growth in capital goods sector on m-o-m basis, the index has recorded growth of 20.8%, indicating resilient investment activity. Further, sustained growth in basic goods, intermediate goods and consumer durables sectors augur well for the overall industrial activity going forward. IIP figures over the next few months needs to be observed carefully in order to assess the sustainability of the current industrial growth.”
In conclusion it clearly means that ‘one swallow does not make a summer’ …India’s growth story is on strong ground and will definitely be sustained.