The Hindu Business Line : Capital goods production growth rate slumps

New Delhi, March 12 Worrisome data came in from the Government on Wednesday, indicating that the industrial growth story might be turning sour. So far, it was the consumer goods segment which was the laggard as far as growth in 2007-08 was concerned, but the latest data on Index of Industrial Production (IIP) have shown a sharp decline in the growth rate of the capital goods sector, which basically means that fresh investments are not keeping pace with the expected growth projections. The capital goods sector growth dropped to just 2.1 per cent.

The IIP data for January 2008 showed that the overall index grew by 5.3 per cent against a 11.6 per cent growth in January 2007, brought down by the decline in all the major segments like mining (1.8 per cent growth against 7.7 per cent), manufacturing (5.9 per cent against 12.3 per cent) and electricity generation (3.3 per cent against 8.3 per cent).

Cumulative April-January 2007-08 data are slightly better, with the mining sector growth at 4.6 per cent (against 4.8 per cent), manufacturing at 9.2 per cent (12.1 per cent) and electricity generation growing at 6.3 per cent (7.6 per cent). Overall IIP for April-January 2007-08 was 8.7 per cent against 11.2 per cent in the comparable period of the preceding year.

Alarming slump

But what has sent out alarm signals is the performance of the capital goods sector. After growing at a healthy rate of 24.5 per cent in November 2007 and a good turnout at 16.6 per cent in December, the capital goods sector growth slumped to just 2.1 per cent in January 2008.

Senior economists in the Government were at a loss to immediately pinpoint reasons for this slump. “It is not clear what has happened. Is it a blip or a reporting problem, I am not sure. Since October 2003, this sector has shown a strong growth trend,” a senior economic advisor to the Government told Business Line.

Other economists believe that industry could be running into a capacity constraint as far as machinery and equipment are concerned. “Except for two-wheelers, where there is a demand problem, it could be a supply side problem,” another economist said, adding that “nobody believed that the Indian economy would be maintaining a near 9 per cent growth.”

The poor performance story of the consumer goods sector continued in January as well. While the overall growth in this segment was 7 per cent against 8.2 per cent in January 2007, consumer durables sank to a negative growth of 3.1 per cent against 5.3 per cent in January 2007. Consumer non-durables reported better results at 10.1 per cent for January 2008 against 9.1 per cent in the previous year for the same month.

The situation was on similar lines in December 2007, with the three segments showing growth rates of 8.7, 2.2 and 10.6 per cent while for November 2007, the situation was worse than in January with all the three segments showing negative growth rates of 2.6 per cent, 4.1 per cent and 2.1 per cent.

FICCI reaction

Reacting to the official data released on Wednesday, FICCI said in a statement that in the July-September and October-December 2007 quarters, manufacturing had witnessed a slowdown and the main reason was the negative growth of consumer durables.

The slowdown in electricity generation and in the capital goods sector in January 2008 were also issues of concern for the manufacturing sector as it would make it difficult to increase the share of manufacturing in the economy.

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Growth of infrastructure sector dips to 4% in Dec

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