It may have been expected that the high base effect would limit industrial growth in December to less than six per cent. But, it was not anticipated that the continued contraction in mining output and a subdued manufacturing production would pull the numbers down to as low as 1.8 per cent. This has led Finance Minister Pranab Mukherjee to express his disappointment.
The electricity sector in the larger category and the consumer goods segment saved the day for industrial growth, while capital goods and, to some extent, the intermediate goods segment were the major lags. The business chambers have again sought a reversal in stance from the Reserve Bank of India (RBI) in its policy review next month.
Economists and market players had expected industrial growth, measured by the Index of Industrial Production (IIP), to be in the range of 3-3.5 per cent for December. However, the actual numbers were much lower, and, after those were released on Friday, the BSE benchmark, the Sensex, erased its earlier gains to close at 17,748.69 points, down 82 points from yesterday’s close.
The IIP had stood at 175.9 points in December 2010, an annual growth of 8.1 per cent. For the first nine months of this financial year, industrial growth was 3.6 per cent, compared to 8.3 per cent in the corresponding period of the previous financial year.
“IIP is disappointing... I hope it will start improving in the next couple of months,” Mukherjee said. Expecting industrial growth to pick up from here on, the Prime Minister’s Economic Advisory Council, Chairman, C Rangarajan pegged the overall economic expansion at 7.5 per cent for the next financial year and 6.9 per cent for 2011-12.
The mining sector contracted for the fifth month in a row. Even the positive coal output growth for the second straight month, at 5.6 per cent in December, could not boost the sector. HDFC economist Jyotinder Kaur said despite the sector being in negative territory, its growth had improved from the lows of minus 8 per cent in September to minus 3.7 per cent in December.
“Coal is just one aspect of mining. Iron ore and natural gas are still facing structural issues,” she said. It was mainly manufacturing that could be blamed for pulling IIP growth down, since it has 75.5 per cent weight in the index. Manufacturing growth slowed to merely 1.8 per cent, against 6.5 per cent in November.
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Mining has been one of the major spoilers for the manufacturing sector, as it has forward linkages with the predominant secondary sector.
AYES Bank report said, within manufacturing, 15 of the 22 industries showed a slowdown in growth in December compared to the previous month.
“RBI will have to factor in the slowing industrial growth,” said Kaur. Asking RBI to shift monetary stance to push investments, CII Director-General Chandrajit Banerjee also pitched for acceleration in the implementation of large projects. “RBI also needs to move quickly from its pause on interest rate increases to a policy of rates to encourage investments,” he said.
Within manufacturing, capital goods saw a major contraction, of 16.5 per cent. “The growth in manufacturing is indeed subdued and, with continuous negative growth of capital goods, we are not looking at any uptrend in manufacturing in the coming months,” said Ficci President R V Kanoria.
Kaur attributed this to subdued investments and policy impediments.
Within capital goods, electrical machinery and apparatus fell around 49 per cent and machinery and equipment over 6.4 per cent.
On the other hand, consumer goods came to the rescue of larger IIP numbers. Their production grew 10 per cent in the month. Within that category, consumer non-durables grew at 13.4 per cent.
“It is heartening to note that the consumer goods sector has performed well, probably reflecting the moderation in food inflation,” Banerjee said.
In broader category, electricity remained positive and grew at 9.1 per cent, but was less than 14.6 per cent last month.
Going forward, low base effect in January and February is expected to throw up better industrial growth numbers. However, March could again see a drop since the numbers were high in that month last year. Finance Ministry officials have, however, exuded confidence that high base effect would not pull IIP growth much.