After months of slowing growth rates, the contraction is here. For the first time in 15 years the index of industrial production (IIP), released on Friday, shows that manufacturing registered a negative growth. For October 2008, the IIP shrank 0.4 per cent, while manufacturing contracted by 1.2 per cent.
This has lowered the average growth of the IIP for the first six months of the current financial year to 4.1 per cent, compared with 9.9 per cent in the previous year. The IIP had risen by 12.2 per cent in October 2007, with manufacturing rising by 13.8 per cent.
Even though this is first time since April 1994 that there has been a contraction in the IIP, the markets almost ignored the news, which according to analysts has been “factored in”. The Sensex ended the day rising 45 points.
But while experts were anticipating a drop in growth rates, the contraction hit them between the eyes. “I think the element of surprise is explained in the deeper recession in the advanced countries,” said Suresh Tendulkar, chairman, prime minister’s economic advisory council.
The biggest culprit for this time’s contraction is exports, which showed a negative growth of 12.1 per cent for October 2008, compared with a rise of 35.6 per cent in October 2007. The big two —leather and cotton textiles — contracted by 18.1 per cent and 9.6 per cent. Leather and textiles account for almost two-fifths of India’s total exports.
October saw the worst of the global meltdown pressure so far. This had a huge impact on global markets, including India’s, leading to a suffocation of credit.
“The contraction in exports, along with the unwillingness by banks to lend and consumers to spend, has led to the present situation,” said Tendulkar.
Looking ahead, the impact of the RBI lowering of policy rates and liquidity enhancing measures over the past six weeks should shortly work their way into the system. As should the Rs 35,000 crore fiscal stimulus package announced last week, with more to follow. “With a reversal in the tight monetary policy stance of the RBI and the government’s announcement on fiscal stimulus package, we hope this trend will change,” said Rajeev Chandrasekhar, president, FICCI.
The downward revision of GDP growth by various institutions such as the World Bank could be negatively revised again, as the IIP contributes 21.3 per cent to the GDP.