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Industrial Production In India Takes October Hit

Indian industry needs new stimulus package to boost sagging industrial production, but outlook for 2009 may not be bleak.

Aw 3313 Indiaflag

India’s Industrial production unexpectedly fell 0.4 percent in October, shocking policymakers by slipping into the negative territory for the first time in 15 years. Many had thought the Indian economy, one of the world's fastest growing markets, would escape a dramatic slowdown.

The Index of Industrial Production (IIP), a measure of industrial activity in the economy, slipped into the negative zone mainly because of the manufacturing sector growth falling to 1.2 percent in October from 13.8 percent a year earlier. Manufacturing constitutes about 80 percent of the total IIP index.

“The situation is much graver than expected,” said Suresh Tendulkar, chairman of the Prime Minister's Economic Advisory Council. The fall in industrial output is likely to lead to revisions in the country’s Gross Domestic Product (GDP) growth forecasts, which stand at around 7 percent for the year to end March 2009. The Indian economy expanded by more than 9 percent on average in the previous three years, but growth has suffered this year in line with a global economic slowdown triggered by a crippling credit crunch in financial markets.

The dire factory figures were a further piece of unwelcome news for India’s policymakers, who have been barraged by dismal statistics lately. Recent numbers show that car sales fell by nearly a fifth in India in November while sales of heavy vehicles (lorries and trucks)—closely linked to industrial activity—plummeted by about half.

Other key indicators of industrial activity—from oil consumption to steel and cement production—have fallen, while exports dropped 12 percent year-on-year in October, after rising 10.4 percent in the previous month.

Outlook not bleak

However, Pronab Sen, the country’s chief statistician, stated that the growth outlook for the rest of the financial year was unlikely to be too bleak, adding that the recently announced fiscal package that seeks to boost spending and cut levies on goods would help consumption and limit the downside risks to economic growth.

According to the corporate world, industrial production would have continued to fall if the government had not given a second stimulus package to prop up stressed sectors, especially manufacturing. “Despite global market turmoil, India’s central bank continued to tighten monetary policy until July—the moderation in demand is a result of the tight monetary policy settings in the first nine months,” said Moody’s, a subsidiary of Moody's group in a statement.

“Whilst the weekend domestic business and economic newslines were dominated by reports of decline in the IIP in October 2008, in equal measure, the data stood contested by analytics and the fast moving consumer goods (FMCG) companies. The latter especially maintained that the production data was not reflective of their performance,” said Aparna Dutt Sharma, chief executive officer, India Brand Equity Foundation in her letter published on its Web site.
An Economic Times Intelligence Group analysis shows that sales growth of listed manufacturing companies in the first half of this financial year (2008-09) has increased by 35 percent—one of the highest in eight years, despite the IIP having posted a negative growth of -0.4 percent in October as against a robust 12.2 percent in the same month last year.

Amidst these developments, a joint panel consisting of the Prime Minister and investment majors is revisiting the implications and resorting to remedial measures.

About the author

Uday Lal Pai,, is a freelance journalist based in India.

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