Slowing industrial output growth makes tough economic situation worse

At a time when policymakers in the country are trying to contain a falling rupee, the industrial production numbers released on Wednesday come as yet another blow for the Indian economy.

The Index of Industrial Production, or IIP, registered a meagre 2 per cent rise in April.

Depreciating rupee and falling IIP make for a deadly cocktail. While slowing IIP reinforces the need for yet another rate cut, the rising pressure on the rupee clearly limits room for rate cuts in the short term.

"The dilemma for the policy makers is high as they wrestle with growth-inflation dynamics... but it is a fair bet that given the seriousness of the pressure on the rupee, rate cuts may be held in abeyance till stability returns to the currency markets," says Krishnamoorthy Harihar, Treasurer of FirstRand Bank.

A dip in the IIP will put more pressure on the government struggling with high current account deficit.

Even though the government has taken some positive steps in the recent past, including setting up a Cabinet Committee on Investment to speed up clearances of infrastructure projects, and Finance Minister P. Chidarambaram making trips to Europe and other Asian countries to lure foreign investors to India, it will take some more time for these steps to fructify.

The disappointment on IIP numbers is all the more pronounced because last year's corresponding base was very low. In fact, the IIP has fallen in April as compared to the previous month when it was revised up to 3.4 per cent. It clearly reflects the continuing broad-based weakness of the country's macro-economic situation.

"Barring a few sectoral surprises, the headline number has grown in line with our expectations. From December 2012 onward, IIP growth has averaged around 1.5 per cent, with macro-economic data offering no definitive signs of an uptick in industrial growth," says Aditi Nayar, senior economist at ratings agency ICRA.