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Base effect slows IIP growth to 1.6%

BS Reporter / New Delhi 12 Feb 11 | 01:00 AM
652 Replies

Won't hurt GDP growth, but rate hike a worry.

Industrial growth slumped further to a 20-month low of 1.6 per cent in December 2010, weighed down by a contraction in capital goods, consumer non-durables and manufacturing. The deceleration comes despite core sector industries — they have a 26 per cent weight in the basket of industrial production — posting a 6.6 per cent growth, vis-a-vis 6.2 per cent a year earlier.

However, the government and economists maintain that industry's performance is not as bad as the numbers suggest, since the high base effect came into play. However, they warned that the effect of high interest rates would be felt in coming months.

Industrial growth, as measured by the index of industrial production (IIP), stood at an 18-year high of 18 per cent in December 2009, which was partly attributed to negative growth a year earlier.

Economists also believe that advance estimates of GDP growth at 8.6 per cent for the current fiscal would not be impacted by the low December IIP figures. That is probably why markets shrugged off the data and recouped initial losses. The BSE Sensex rose by 265.57 points to close out the week at 17,728.61 points on Friday. (Click for graph)

After industrial growth plunged to 2.71 per cent in November, analysts expected it to rebound in December, particularly after the six core sectors showed a marked improvement in December, against November. November industrial growth now stands revised at 3.62 per cent.

Expressing disappointment, Finance Minister Pranab Mukherjee, however, said the monthly numbers should not necessarily be taken at face value. "IIP numbers are very unfortunate and it is disappointing. But it is on expected lines, as it is on a yearly basis… Monthly and weekly numbers do not reflect the correct picture," he added.

Within IIP, manufacturing registered a meagre growth of 1 per cent, decelerating from 2.24 per cent in the previous month and 19.6 per cent in the corresponding month of 2009. The sharp decline in manufacturing is primarily due to a 13.7 per cent fall in capital goods during the month. However, as capital goods had grown by 42.9 per cent in December 2009, the decline in December 2010 is partially due to a high statistical base effect.

Growth in mining also decelerated to 3.8 per cent in December from 7.43 per cent in the previous month and 11.1 per cent in the same month the previous year. However, growth in electricity generation picked up, both on a sequential and annual basis, during the month to 6 per cent, against 5.4 per cent in December 2009 and 4.58 per cent in the previous month.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said the monthly variations in IIP should not be a cause for concern. "Month-to-month variation should not occupy us too much… this high frequency data is not an indication of the underlying trend," Ahluwalia said.

Consumer non-durables production contracted by 1.07 per cent. Arun Singh, a senior economist at Dun & Bradstreet India, said the persistent underperformance of this sector is worrisome. "The decline in production of consumer non durables could in part be attributed to high inflation. Looking at the current economic scenario , RBI will have to monitor development with regard to the inflation rate and impact of high interest rates on overall economic growth," Singh added.

Among the 20-item categories, four registered a contraction, with machinery contacting by 12.8 per cent , basic chemicals by 2.6 per cent , wood & wood products by 17.3 per cent while tobacco & beverages contracted by 9 per cent .

Commerce & Industry Minister Anand Sharma said that government is paying attention to the fall in industrial machinery output. "There are certain concerns on capital goods, meaning that capacity expansion is not taking place. The fall is mainly in industrial machinery. It is receiving serious attention from the government," Sharma said.

Economists said the numbers do not indicate a slowdown in the industrial sector. But at the same time, they believe the IIP figures will continue to be low over the next few months due to the high base. "Significantly lower growth in IIP numbers should not raise concerns on the health of the economy, as it is mainly a statistical phenomenon. Further, a revision in the numbers for November is a positive development," Singh said.

Industrial growth is estimated at 8.1 per cent for this fiscal. In the first nine months, it stood at 8.6 per cent, even with the low numbers in December. Clearly, the deceleration has been factored into the estimated GDP numbers.

Crisil India Chief Economist D K Joshi said weaknesses in capital goods growth and continuing underperformance of consumer non-durables are also because of volatile data. "The capital goods data is extremely volatile and going by the trends in demand, there seems to be some under-reporting in the consumer non-durables data as well," Joshi said.

Consumer durables, however registered double-digit growth of 18.53 per cent, up from 4.4 per cent in November, even over a high growth of 41 per cent last year.

"The growth in consumer durables substantiated that the low growth in November 2010 was largely related to the early onset of the festival season in 2010, compared to 2009. Nevertheless, rising interest rates are expected to moderate consumer demand to an extent in coming months," said Aditi Nayar, an economist with ICRA.




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