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Industrial production contraction – Temporary Blip

December 12, 2008

Industrial production for Oct-08 contracted 0.4%. This was way behind market expectation. The last industrial-production contraction registered back in Apr-94. Manufacturing, the major part of industry, declined by 1.2% in Oct-08. Mining and electricity grew 2.8% and 4.4%, respectively.

Auto, chemicals, food products nonmetallic minerals and textiles contracted significantly. While the performance of almost all industrial categories deteriorated, the fall has been most marked for capital and intermediate goods.

Compared to the 15% export-GDP ratio for the whole economy, the ratio was over 50% for manufacturing. A near freeze of international trade finance in Oct-08 and stalling global demand seem to be the main factors behind the contraction of manufactured output.

Industrial growth is likely to be subdued during Nov-08 as well. Lacklustre industrial sector performance since Aug-08, however, does not necessarily indicate an impending recession/sharp growth slowdown in India. Recent improvements in domestic liquidity and the credit situation and the pro-active stance of the authorities are likely result in a modest bounce back in 4QFY09.

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