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An early frost is setting in

Industrial output has been crawling since November but the picture is not all that grim.

india Updated: Apr 12, 2011 22:44 IST

Industrial growth caught a chill in November and the downturn has lasted all of this winter with rates languishing below 4% for four months on the trot. Factory output grew a measly 3.6% in February 2011, down from 15.1% in the same month a year ago. Industrial performance is looking stunted against the breathtaking pace notched up between December 2009 and March 2010, when the growth rate averaged 16.4%. In fact, the March and April 2010 figures were 15.5% and 16.6% respectively, so the next couple of data sets due on the index of industrial production are poised to look especially anaemic. Having said that, India's industrial growth in April-February 2010-11 at 8.1% has not fallen too far behind the 9.9% of the year-ago period.

The dip this February owes much to shrinking demand for capital goods - the machinery and electric generators that go into the making of the stuff we eventually buy. The output of capital goods fell by 18.4% in February after falling a similar 18.8% in January, but this has to be seen against the eye-popping growth rates of 46.7% and 57.9%, respectively, in the same two months of 2010. Here again, a longer horizon improves the picture: capital goods have grown 14.6% in April-February 2010-11 trailing by not too wide a margin the 17.9% clocked in the same 11 months of the previous financial year. Lumpy investment demand has made India's index for factory output careen wildly, even though consumer demand has steadied after the 2008 credit squeeze. Demand for consumer durables like cars and refrigerators is on trend while that for perishables like soap and packaged food is looking robust against the declines of January-February 2010.

The jumpy factory output data for most of this financial year will influence policymaking in key areas. One, it will temper the central banks' zeal to raise interest rates to cool food inflation, which is stubbornly refusing to come off its high perch. The Reserve Bank of India has resumed its rate-hiking cycle, but the actual hikes going forward could be lower than what it would be happy with. Two, the government's job in pulling up tax rates lowered to fight the 2008 credit crisis may get that much more difficult: the inflationary impact of higher taxes is all too apparent, and the dips in industrial production will lend weight to the naysayers. Finally, the index of industrial production has been gyrating wildly, sometimes in direct contradiction to the anecdotal evidence. To be useful as a forecasting tool, the index itself may need an overhaul.