Industrial output shrinks 0.6%, dashes economy recovery hopes

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The slump in IIP data for December 2012 has come as a surprise to many experts. (Reuters) The slump in IIP data for December 2012 has come as a surprise to many experts. (Reuters)
SummaryThe Index of Industrial Production (IIP) had grown by 2.7 per cent in December, 2011.

Indicating persistent sluggishness in the economy, industrial output contracted to 0.6 per cent in December due to poor performance of manufacturing and mining sectors and decline in production of capital as well as consumer goods.

The industrial output, as measured by the Index of Industrial Production (IIP) had grown by 2.7 per cent in December, 2011.

Industrial production growth stood at 0.7 per cent during April-December period of this fiscal, down from 3.7 per cent in the same period of 2011-12, according to official data released here today.

Meanwhile the decline in industrial output for November 2012 has been revised downwards to 0.84 per cent from a contraction of 0.1 per cent in the month as per the

provisional estimates released last month.

The growth in industrial output for October last year has, however, been revised upward to 10.66 per cent from the first revision of 8.3 per cent released last month. The manufacturing sector, which constitutes over 75 per cent of the index, registered a contraction of 0.7 per cent in December in 2012, as against a growth of 2.8 per cent in 2011.

The growth in the output of the key sector remained low at 0.7 per cent in April-December last year as against 4 per cent growth in the same period of 2011.

The mining output in December last year contracted by 4 per cent compared to a decline in production by 3.3 per cent in the same month in 2011.

In April-December, the production in the sector declined by 1.9 per cent, against a contraction of 2.6 per cent in the year-ago period.

Capital goods output declined by 0.9 per cent in December, as against a contraction of 16 per cent in same month of 2011.

Capital goods output also contracted in the April-December period by 10.1 per cent, as against a dip of 2.9 per cent in the same period of 2011-12.

Consumer goods output also saw a contraction of 4.2 per cent in December as against a growth in production by 10.1 per cent. In the April-December period of this fiscal, the growth in the segment was 2.6 per cent as compared to 5.7 per cent in the same period of 2011-12.

The dip in the output of consumer durables stood at 8.2 per cent in December, as compared to a growth of 5.1 per cent in the same month of 2011.

The growth in the output of these goods was at 3.7 per cent in April-December 2012, compared to 5.1 per cent in same period previous fiscal.

The consumer non-durables output dipped by 1.4 per cent in December, as against a growth of 13.8 per cent in the same month a year-ago. This segment grew by 1.7 per cent in the nine-month period of this fiscal, as against 6.1 per cent in the same period of 2011-12.

The intermediate goods production also contracted by 0.1 per cent in December, 2012 compared to a decline in output by 1.5 per cent in same month a year ago.

During the April-December period, this segment recorded a growth of 1.6 per cent, compared to a contraction of 0.7 per cent in the first nine months of last fiscal.

The basic goods output grew by 2.6 per cent in December as compared 5.5 per cent in the same month of 2011. During the April-December period of this fiscal, output of these goods rose 2.7 per cent compared to 6.3 per cent in the nine-month period a year ago.

Power generation grew by 5.2 per cent in December last year, as against 9.1 per cent in same month of 2011. The electricity generation in the April-December period this

fiscal stood at 4.6 per cent, as against 9.4 per cent in a year-ago period.

In terms of industries, 12 out of 22 groups in the manufacturing sector have shown negative growth in December, 2012 as compared to the same month in 2011.

India economy recovery hopes dashed as output unexpectedly shrinks

(Reuters): India's industrial production unexpectedly shrank for a second straight month in December, weighed down by weak investment and consumer demand, casting doubt on Finance Minister P. Chidambaram's view that Asia's-third largest economy is showing signs of recovery.

The index of industrial production (IIP) fell 0.6 percent annually in December, data released by the Central Statistics Office showed on Tuesday.

A Reuters poll of 24 economists had expected growth of 1.1 percent, after output shrank 0.8 percent in November.

Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 percent to overall gross domestic product (GDP), fell 0.7 percent in December from a year earlier.

"What is clear is that any meaningful industrial recovery is eluding us. Demand destruction is far more well entrenched than we thought," said Sujan Hajra, chief economist at brokerage firm Anand Rathi in Mumbai, who said he now sees GDP growth next year of 5-6 percent.

Preliminary data from India's statistics office last week predicted growth of 5 percent for the fiscal year ending in March 2013.

That was worse than anticipated and triggered an angry response from Chidambaram.

Chidambaram said the Central Statistical Organisation had used "dated data" and argued that GDP growth was following an upward trend in a sign of revival. He reiterated his view that 5.5 percent growth was possible.

"We can recapture the magic of 2004-08. The average growth was 8.5 per cent during that period," he said on Saturday.

"Why should we, without any reason, denigrate our own performance and record? I have no doubt in my mind that we will come out of the trough and we will climb back to a growth rate of between 6-7 percent next year," he said.

Chidambaram is under political pressure to unveil a growth-oriented budget on Feb. 28 for the next fiscal year, as the government of Prime Minister Manmohan Singh gears up for an election due by early 2014 at the latest.

But he is also faced with the arduous task of trimming a swollen fiscal deficit that has put India's investment-grade credit rating in peril. He has already ordered spending cuts in welfare, defence and road projects for this financial year.

Critics warn that at a time of low growth, lower spending risks deepening the slowdown without helping the deficit-to-GDP ratio.

RATE CUTS MAY HELP

The Reserve Bank of India reduced its policy interest rates by a widely expected 25 basis points on Jan. 29 to spur the economy, and investors hope slower price rises will lead to another.

"Despite incremental efforts we are still staring at a weak growth print," said Jyotinder Kaur, economist at HDFC Bank.

"We expect a rate cut in March as growth is consistently surprising on the downside while the pace of CPI (consumer price inflation) has stabilised."

Consumer price inflation inched up to 10.79 percent in January from 10.56 percent a month ago, according to other data on Tuesday.

January wholesale price index data, which the Reserve Bank of India gives more weight to in setting policy, is due on Friday. The index for December rose 7.18 percent, the slowest in three years.

COMMENTARY

JYOTINDER KAUR, ECONOMIST, HDFC BANK, MUMBAI

"This is yet another indication that while things could have bottomed out, the past recovery is considerably far away. High inflation is impinging on purchasing power and so industrial growth is slowing, while the government is clamping down on expenditure which is certainly not helping growth. So all this is not a pretty picture. Despite incremental efforts we are still staring at weak growth print. We expect rate cut in March as growth is consistently surprising on the downside while pace of CPI (consumer price inflation) has stabilised."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI, MUMBAI

"What is clear is that any meaningful industrial recovery is eluding us. Demand destruction is far more well entrenched than we thought. This, with FY13 advance GDP estimates, clouds the outlook for FY14 growth. We now think that FY14 growth may be between 5-6 percent.

"We stick to our call that the RBI will lower the repo rate by 75 basis points in the rest of 2013."

BACKGROUND

India's current account deficit is likely to reach a record high in the fiscal year that ends in March, the central bank governor warned, a gap which the bank said previously needed to shrink for it to cut interest rates further.

The government is likely to borrow less in 2013/14 than in the current fiscal year because of its surplus cash balance, two government sources told Reuters, which could help bolster growth prospects by reducing borrowing costs for private investors and facilitating a pick-up in capital investments.

Car sales fell an annual 12.5 percent in January, the third consecutive slide and the fifth in six months, an industry lobby group said on Monday, as sales of cars in a once-booming market head for their worst growth in nine years.

Headline inflation likely eased again in January to its lowest level in over three years due to a smaller rise in prices for manufactured goods, a Reuters poll showed, but it will probably remain well above the Reserve Bank of India's perceived comfort zone of around 5 percent for a while, giving the central bank little room to ease monetary policy aggressively.

India's slowest growth in a decade could be worse than anticipated, as preliminary data released on Thursday showed the economy set to have grown 5.0 percent in fiscal year ending next month, underscoring the urgent need for reforms to boost growth.

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