FEB IIP - THE SLOWDOWN IS MORE PRONOUNCED

By Ruma Dubey

The number is much lower than what was expected and as expected, there was disappointment. Expectations might not have gone up if the numbers in January had not been as good thus the bar of expectation was raised much higher. Eyes had popped out and jaws had dropped when in Jan, Consumer Non Durable growth was at a baffling 42.1%, leading most to wonder about the validity of IIP at all, given the amount of volatility in the numbers.

The Govt seems to have given cognizance to that fact and in the Press Release for Feb IIP numbers, it has explained that the revised indices for January, 2012 have undergone major changes mainly due to correction in the production data of sugar which was originally reported as 134.08 lakh tonnes and subsequently rectified to 58.09 lakh tonnes. This wrong figure was taken because of incorrect reporting by the Directorate of Sugar in the Ministry of Consumer Affairs, Food & Public Distribution.  Immediately after detection of the error, the revised IIP numbers and growth rates for the month of January, 2012 have been compiled.  Due to this change and also minor updation of data received from other source agencies, the IIP for January 2012 has been revised from 187.9 to 177.9 and, therefore, growth rate over the corresponding period of previous year has been revised from 6.8% to 1.1%.  Further, cumulative index for the period April, 2011 to Jan’12 which was released as 169 has been revised to 168.  Consequently, cumulative growth rates have been revised from 4% to 3.4%. These changes have resulted in decline in the growth rate of Index for consumer non-durables, which was reported earlier as 42.1%, to 11%.  Further, the growth rate of overall consumer goods reported earlier as 20.2% has declined to 2.9%.

Thus is comes as a shock to know that Jan IIP was down at 1.1% v/s the 6.8% reported and this once again raises the question of whether it is right to be so dependent on the IIP numbers which are turning out to be more and more unreliable. It is good to admit one’s mistakes but to have mistakes cropping into something as core as the IIP numbers does make wonder about the way in which we calculate the entire IIP.

What this also means is that maybe we should give this data as much relevance as we do. It should be more about a hazy indication of things and have to bear in mind that it does not strictly indicate the reality, as is. Thus IIP should be more of a broad perspective and nothing more. But will RBI do that?

Unfortunately like us, RBI too has one indicator of the growth and that is IIP. Thus it will continue, just as we too will, due to lack of better alternative, to depend on IIP numbers. And based on these numbers, it does look like the RBI will react with a token 25 bps rate cut, which would be more of a tokenism, indicating that the rate cut cycle has begun. The aggressive way in which rates were hiked, might not be the way to go when it comes to rate cuts; it will hinge on conservatism.

And while on IIP, it is also important to look at the capital goods sector growth. It came in at 10.6% v/s the contraction of 1.5%. As per those in the industry, this is purely because typically in Feb and March, companies tend to rush to place orders for capital goods to beat the fiscal year ending and has got nothing much to do with actual realities on the ground. If this logic holds good, it would be good in March too. Thus it would be too naïve to celebrate the growth in capital goods sector. .

Trend of investment continues to remain slow and this is one data, which has remained consistent in all the IIP data. Part of slowdown in the investment cycle is due to higher interest rates and higher costs. Smaller projects are coming into fruition rather than bigger projects. Pent up demand is there and wherever it can be met, mainly through smaller projects, it is getting done. But unless larger projects take off, we cannot expect investments to pick up.

Oil is hovering around $125/barrel and this means inflation is sure to raise its ugly head once again. Surely at this juncture, no one would be in the shoes of the RBI Governor, Mr.Subbarao as he has a tightrope walk over thin ice.