Industrial growth caught a chill in November and there are signs the downturn may last most of this winter. Factory output grew a measly 2.7 % in November 2010, down from 11.3 in the same month a year ago. Going forward, the worry is industrial performance may look stunted against the breathtaking pace notched up between December 2009 and March 2010, when the growth rate averaged 16.4 %. In fact, the December 2009 figure is an eye-popping 17.9 %, so the next set of data due on the index of industrial production is poised to look especially anemic. Having said that, India's industrial growth in April-November 2010 at 9.4 % is comfortably higher than the 7.4 % of the year-ago period.
The exceptional dip this November owes much to flagging consumer demand. Rising inflation crimped purchases of clothes and packaged food—production of perishable consumer goods actually shrank by 6 % during the month. And in a month after the Diwali buying frenzy, Indians cut back on big purchases like cars and refrigerators. The weakened consumer demand spilled over into intermediate goods, which grew at an eighth of the pace of November 2009. However, the core of Indian industry—machinery and electric generators that go into the making of the stuff we eventually buy—kept up its momentum. This and the fact that our machinery-intensive imports are rising at a rapid clip should ease some of the worry about an overall industrial downturn. Besides, the service sector is on course to grow at close to 9 % and farm produce ought to clock good numbers in a year after a bad monsoon played havoc with the harvest.
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 high double-digits. The Reserve Bank of India is poised to resume its rate-hiking cycle next fortnight, but the actual hike could be lower than what the markets are expecting. Two, the government's plan to pull up tax rates lowered to fight the 2008 credit crisis may get delayed. The inflationary impact of higher taxes is all too apparent, dips in industrial production will lend weight to the naysayers. Finally, the index of industrial production has been see-sawing wildly, sometimes in direct contradiction to the anecdotal evidence. To be useful as a forecasting tool, the index itself may need an overhaul to capture reality better.