Sluggish IIP data set to weigh heavily on monetary policy: FM

Written by fe Bureau | Mumbai | Updated: Apr 13 2012, 18:17pm hrs
Pranab MukherjeePranab Mukherjee
The index of industrial production (IIP) rose a lower-than-expected 4.1% in February as manufacturing slowed while consumer goods and durables contracted, official data showed on Thursday, bolstering the case for a rate cut when the central bank meets next week. What made matters worse was that the government also sharply revised downward the industrial output figure for January to 1.14% from 6.8%, citing a significant revision in the production data of sugar following incorrect reporting by the directorate of sugar under the food ministry.

Finance minister Pranab Mukherjee blamed a protracted bout of monetary tightening and a global macro-economic crisis for the dis- appointing industrial growth. These figures will have a bearing on monetary policy announcement scheduled for next week. The government, along with RBI, will take required steps to revive activity in the economy, he said.

Although the finance ministry has been pitching for monetary easing to stimulate the economy for quite some time, the Reserve Bank of India has demurred, citing price pressures in the economy from a flare-up in crude oil, and a widening fiscal deficit.

With the downward revision of January data, growth in February looked better, but it is still slower than 6.7% achieved a year earlier, as per Central Statistical Office data. Production recorded its fastest growth of 9.45% in June before contracting by 4.7% in October and again expanding to 4.1% in February, marking a roller-coaster ride in the last fiscal.

Explaining the error in the January data, TCA Anant, secretary, ministry of statistics and programme implementation said: The weight of sugar in overall IIP is 1.5% but if you multiply 1.5% with a certain number, then the size makes the difference. My guess is, 95% of the change is on account of sugar, although there may be some small adjustments which may be on account of other reports. Sugar is part of the food and beverages product category and consumer non-durables group; it's part of manufacturing.

Prime Minister's Economic Advisory Council chairman C Rangarajan said output hasn't picked up and will grow 3.8% in 2011-12. He said the government would set up a committee to examine the IIP figures to tighten various sources of data collection.

Manufacturing activity, accounting for about 76% of industrial output, rose 4% in February, compared with 7.5% a year earlier. Mining gained 2.1%, registering its first growth after sixth straight contraction, as against 1.2% growth a year earlier, data showed. Electricity generation rose 8% from 6.8% a year before.

The market discounted the fall in industrial output, as bets on a rate cut next week mounted, with the Sensex gaining 0.77% at 17,332.62 points on Thursday. The 10-year benchmark bond fell 11 basis points to settle at 8.44%, while the benchmark five-year swap rate closed 1 basis point down at 7.53%.

Consumer non-durable goods rose 5.1% in February, compared with 9.7% a year before. However, consumer goods contracted 0.2% during the month, compared with a 13.4% expansion a year earlier. Consumer durables output shrank 6.7% from an expansion of 18.2% a year earlier.

During April-February, manufacturing rose 3.7% from a year earlier, while mining contracted 2.1% and electricity generation advanced 8.7%, according to CSO data. Overall, industrial output grew 3.5% during April-February compared with 8.1% a year before.

Sustained monetary tightening by the Reserve Bank of India since March 2010 to rein in inflation has driven up borrowing costs and squeezed manufacturing and other activities. The central bank eased cash reserve ratio by 75 basis points on March 9, on the back of a 50 basis points cut in January to prop up liquidity, but elevated borrowing costs still pose challenges to a significant manufacturing recovery, analysts said. A widening fiscal deficit and still-uncomfortable level of inflation have added to policymakers' worries.

Inflation has been moderating over the last few months. However, rise in petroleum prices is likely to put pressure on domestic inflation. Further, the government, in order to bring down fiscal deficit reduced petroleum subsidy by 36%. Therefore, the impact and movement of petroleum prices needs to be assessed, said Madan Sabnavis, chief economist, CARE Ratings.

The government has forecast a 6.9% expansion of the gross domestic product (GDP) for the 2011-12 fiscal, the slowest since 2009, as the monetary tightening has hurt growth. Analysts say the central bank may finally cut rates although increasing tensions between Iran and the US threaten a flare-up in oil prices.

India's annual consumer price inflation index rose 8.83% in February from a year before, while wholesale price-based inflation rose 6.95%.