Industrial output growth slumps to 3% in March on a steep base of 14.4%. But with inflation soaring & the rupee sliding, there's little hope of a rate cut for India Inc

    THE sharp drop in industrial production in March to a six-year low of 3% may have triggered fears of a slowdown, but economists are still holding onto an 8%-plus growth projection for 2008-09. The optimism among policymakers and economists, however, is not shared by industry players, who believe that high interest rates and rising input costs have started impacting demand.

    High inflation, however, rules out any possibility of rate cuts to stimulate growth. Industrial production, as measured by the Index of Industrial Production (IIP), grew at a disappointing 3% in March 2008 compared to 14.4% in March 2007. As a result, industrial production growth slipped to 8.1% in 2007-08 from 11.6% in 2006-07.

    The industrial growth rate for March 2008 is the lowest since February 2002. But the government has little leverage to boost growth. "In view of high inflation as well as inflationary expectations looming over the economy due to spiralling crude and commodity prices along with a depreciating rupee, maintaining price stability will be a difficult task for the central bank. Thus, expecting any kind of rate cut is completely out of question,'' said Crisil principal economist DK Joshi.

    The industrial slowdown is largely because of the sharp drop in manufacturing, which has a high weightage in IIP. Manufacturing grew 2.9% in March 2008 against 16% in March 2007. Even electricity (3.7%) and mining (3.8%) grew below their trend rates.

    There is a silver lining, though, since part of the drop appears to be due to the high base effect--industrial growth in March 2007, the base for calculating growth in March 2008, was unusually high. "There is certainly a base effect, and average industrial growth has slowed down in the current year from about 10-10.5% in the previous year. If you take the month-on-month numbers and look at March over February, you will find a 23-point increase in the general index, which will translate to a growth of nearly 8.5%. Basically, in March 2007, growth had been 37 points over a base of 250, so that was a huge increase. We are really seeing the base effect and there is no slowing down if you look at it on a month-on-month basis," Central Statistical Organisation head Pranab Sen said.

    The higher sequential growth (March over February), which had turned negative in February 2008, underscores the point. IIP went up by 23 basis points in March 2008 over February 2008, after registering a fall of 8 basis points in February over January.

    But there are others who are not buying the high base effect explanation. Industrial growth is slowing down, they argue, thanks to higher interest rates and rising cost of inputs, which are hitting company margins and their ability to invest. Capital goods sector shows signs of fatigue

    Deutsche Bank Asia Pacific head Sanjeev Sanyal said, "There is no doubt that higher base effect is the main reason, However, in view of rising cost of production and slackening consumer demand, one cannot deny that companies are cutting production as well as investments. It's not only a languished consumer durables sector but also the manufacturing sector, which grew at a mere 2.9% in March, that has dragged the whole index down. It is a cause for concern."

    The growth in capital goods sector is showing signs of fatigue. It has slipped to 8.6% from 18.1% in the corresponding period last year. The consumer durables sector continues to worry. It turned in a negative growth of 2.1% in March 2008 as compared to a 3.8% rise in the same month last year. In fact, between April 2007 and March 2008, the average growth in the sector was (-)1%. This is largely due to the decline in two-wheeler sales.

    The de-growth that the motorcycle industry is witnessing is largely due to lack of enough retail finance options for motorcycle buyers. Even the excise cut has not helped. "Unless the retail finance situation improves, the motorcycle industry will see little impact of the excise duty cut," said Hero Honda managing director Pawan Kant Munjal.

    The lower March numbers have come in the backdrop of RBI's annual monetary policy, where it has forecast higher industrial growth in the coming months and maintained the GDP growth target at 8-8.5%, much higher than experts' forecast of 7.5-8%. With crude prices touching new highs and inflation continuing to rise--it touched a three-anda-year high of 7.6% for the week ended April 26--the central bank may not be in a hurry to cut rates.