Sluggish IIP growth hints at tough policy

India’s industrial production growth slowed to 1.8 per cent in December from a high of 5.94 per cent the previous month, mainly due to a contraction in the capital goods output, indicating that the government needs some tough policy measures to boost investment.

The slower than expected IIP growth took the market and the government  by surprise as there were estimates the growth in December will be close to 4 per cent.

IIP growth was 8.1 per cent in December 2010. Concerned at the pace of growth, Finance Minister Pranab Mukherjee said he was disappointed by the numbers, but expressed the hope that industrial output will pick up from the next couple of months.

“It is disappointing. On the whole, the IIP growth is not well. I hope from the next couple of months, it will start improving,” he said. The capital goods output contracted 16.5 per cent in December from 4.5 per cent the previous month. Capital goods output had grown over 20 per cent in December last year.

Mining output too declined to 3.7 per cent from 4.4 per cent last year, impacting the growth in overall IIP number.

The slowdown in December IIP was clearly indicated in the weak core sector numbers that were announced earlier.

Core Sectors like steel, cement, fertilisers, crude and refinery grew by only 3.1 per cent in December compared to well over 6 per cent in November. Core sector comprises 38 per cent of the IIP basket.

According to the Prime Minister’s Economic Advisory Council Chairman C Rangarajan, the contraction in mining sector off late was mainly due to low production of coal. Rangarajan expressed the hope that coal production will pick up in coming months as there were positive indications from the sector.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said that the numbers are expected to bottom out in the third quarter (October-December) and revive in the January-March period. But analysts said that industrial activity has been inert for some months due high interest rates in India, which have impacted credit flow by banks to industry and weighed heavily on investment.

They said that the November industrial output numbers went sharply up due to the timing of Diwali, which has a great significance for Indian consumers. Industrial output shrank 4.7 per cent in October, the first contraction in over two years, after a 2.0 per cent rise in September and a 3.4 per cent increase in August.

Contrary to the contraction in capital goods, the consumer goods output showed a 10 per cent upswing from a meagre 3.5 per cent last month, indicating increasing purchasing power of people, especially in rural areas.

Electricity generation also witnessed a good growth of 9.1 per cent in December 2011, compared to 5.9 per cent in the year ago period.