IIP SHOWS CLEAR SIGNS OF A SLOWDOWN

Economic growth Index of Industrial Production for June 2008 fell to 5.4% as against 8.9% in June 2007. But month-on-month, the growth has bettered from 4.1% recorded in May 2008.Manufacturing sector was the main gravitational pull, the main culprit pulling down the IIP growth. Manufacturing which accounts for two-thirds of the IIP fell down dramatically from 11.1% in June 2007 to 5.9% in June 2008.
Growth of capital goods sector also was down. From double digits in 2007, it has slipped into a single digit now. The growth rate for June 2008 was at 5.6% compared to whopping 23% in June 2007. For the entire quarter, April-June 2008, the growth was a little over 6% but this is a paltry figure when compared to the average growth of 20% in Q1FY08.Growth in six core infrastructure industries slowed down to 3.4% in June as against 5.2% in the year-ago period. During the April-June quarter of the current fiscal, the growth rate of the six core industries - crude oil, petroleum refinery products, cement, finished steel, coal and electricity – fell 3.5% as against 6.4% in Q1FY08. Not surprisingly, coal was the only sector which posted a growth of 6.2% against 0.9% in Q1 is previous fiscal. Crude oil production registered a negative growth of 4.7%, petroleum refinery products fell to 5.6%, cement declined to 3.8%, finished steel production also slowed down to 4.4%.The other “infrastructure” sector was electricity, which fell from 6.8% in June 2007 to 2.6% in June 2008 and this, for the entire of Q1 was at 2%. The mining sector can be called a mixed bag as it grew YoY and fell sequentially. Mining growth in June 2008 was at 2.9% as against 1.5% in June 2007 and 5.2% in May 2008. The YoY growth is slower than the fall in the sequential growth.So when all the sectors were down, what helped the IIP grow at all? The consumer goods sector. This sector gathered momentum in June registering a growth of 3.5% against a negative growth of 3.6% in June 2007, pushing up the overall consumer sector growth to 10%. After all this number crunching, what is the emerging writing on the wall? Undoubtedly, the growth rates are showing signs of a slowdown. The growth in the consumer goods sector comes as a surprise as usually, it is the first quarter which usually shows a fall in demand. But this unexpected demand surge could be due to the impending interest rate hike. All knew that RBI, in its credit policy in June would announce a rate hike and interest rates were bound to go up. So, to take advantage of this situation, rushing to buy before the rate hikes, helped shore up the consumer goods figures.
Interest rates were hiked on 29th June, so the effect of this would be seen only in Q2. SBI today announced a 1% rate hike in its prime lending rate (PLR), which now stands revised at 13.75%. Others will follow suit and this is sure to cut down the demand, notwithstanding the ‘Big Sale’ announced by Big Baazar, Subhiksha, More and the rest!If the growth rates have to improve, it is then imperative that oil price continues to cool off. Crude is currently at $113 despite the onging tensions in Georgia. And no one knows why the prices are slipping now and when it is the unknown, it is indeed worrisome. The trend of the oil prices would decide where our economy would head in the months to come. It would be too early to say that we have seen the bottom of the growth rates in May 2008 and now things will only look up. The slowdown in infrastructure sectors is most worrisome.The auto sector has shown a dip in sales for the first time in three years. When the auto sector cuts down production or when demand slows down, all the other industries which are indirectly dependent on the auto sector would also slowdown.The markets have been trading in the positive zone and again, this is directly related to falling crude prices and the positive global sentiments. But how long this would last? No one knows.