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Slowdown fears deepen as IIP growth contracts 5.1%

Contraction after more than 2 years: worried govt convenes industry meet on December 19

BS Reporter  |  New Delhi 

The optimism exuded by the government of 7.5 per cent economic growth this financial year on a better second half is ringing hollow, with industrial output contracting 5.1 per cent in October. The contraction, seen after more than two years, was led by a 25.5 per cent fall in the capital goods sector, despite the festive season.

It may not be a repeat of what happened during the global financial crisis, when industrial production contracted for seven months in a row from December 2008. But, the euro zone crisis, the RBI’s tight monetary stance and the government’s policy inaction have subjected the economy to tough times. The manufacturing and mining sectors are among the worst affected.

Manufacturing output declined six per cent and mining 7.2 per cent. This was the third month in a row that mining output contracted and the fourth month of falling numbers out of seven so far this financial year.

None of the use-based industries — basic goods, intermediate goods, capital goods and consumer goods — saw positive growth. Capital goods segments such as electrical machinery and equipment witnessed a whopping 58.8 per cent fall, while machinery and equipment contracted 12.1 per cent.

The indications were already there, though. Passenger car sales in the domestic market declined 23.77 per cent in October, the sharpest drop over a decade. In mining, coal production fell for the third month in a row, by nine per cent in October. The eight core industries yielded more or less flat growth, with five segments contracting and cement remaining flat.

Economists say, probably, all the data were not reported in October and some may spill over to the next month, which may push Index of Industrial Production (IIP) growth into a positive zone.

However, bigger concerns may emerge not in November but in December, as the month last year saw IIP go up to 175.6 points from 158 in November. So, December might see contraction on a high base, economists said.

The Prime Minister’s Economic Advisory Council chairman C Rangarajan is still hopeful of 7.5 per cent economic growth this year, with agriculture and services expected to perform better. However, he does not rule out a 7.25 per cent growth scenario.

“The (IIP) numbers are disappointing. We should see some revival in the last quarter of the current fiscal. We should see economic growth in the range of 7.25-7.5 per cent as agriculture will do better, services are doing well and manufacturing is not doing good but is expected to do better,” Rangarajan told Business Standard.

The economy grew 7.3 per cent in the first half.

Commerce and industry minister Anand Sharma said the lacklustre performance had drawn government attention at the highest level. He will hold talks with industry representatives on December 19.

First Published: Tue, December 13 2011. 00:50 IST