By Ruma Dubey

Negative IIP???? This comes as a complete slap from the dark. We all were bracing for a lower IIP but in the positive. No one had ever expected a negative IIP and that too as low as -0.4%. Yes, we are in a downturn and the recovery is going to be very gradual. This is a huge sobering truth which has hit us today morning just as India gets set to enjoy the biggest festival of the year, Diwali.

Capital goods as usual remains a huge worry. The fluctuation in the numbers on a MoM is extremely disturbing. How can one see such volatility? But as the table indicates we are consistently seeing the sector almost always in the negative and Feb was a blip when it showed a huge positive growth at 10.6%.

What is extremely worrying this time around is the fall in manufacturing sector too. In terms of industries, 12 out of the twenty two 22 industry groups in the manufacturing sector have shown positive growth during the month of September’12 on a YoY. And this ‘positive’ is once again showed by inane industries like ‘Publishing, printing & reproduction of recorded media, Wearing apparel; dressing and dyeing of fur’ and only sector of real strength being Coke, refined petroleum products & nuclear fuel. The sector which showed the maximum fall in the manufacturing sector is Office, accounting and computing machinery – it fell 31% (YoY) but can this sectors fall push the entire sector into a degrowth? Other sectors which showed a fall were tobacco products and Electrical machinery & apparatus. Seriously, are these really sectors which matter the most when we talk of manufacturing?  

No one estimated a negative IIP, not even the so-called experts on the economy could predict a degrowth in September. So does that mean that the experts do not know their job well or more likely, is the method of calculating the IIP completely skewed?

The negative IIP can be entirely blamed on the lack of investment in creation of new capacity. 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 and IIP to pick up and maintain the upward momentum.

Typically, all have once again started looking at the RBI and feel that it ‘HAS TO’ reduce rates now that the IIP has gone into the negative. But it is really not RBI’s job to look after the growth; that is the Govt’s job. RBI’s primary objective is to look after inflation and that data, which came in today was not very encouraging. CPI for Oct was at 9.75% v/s 9.73% on a MoM. This data does not include the hike in fuel prices and those numbers are expected on Thursday. It is expected to be high and that naturally means, RBI will continue to sit tight on the interest rates and we might see a rate cut only in Jan’13.