Industrial growth to remain below 8 pc: IEG

New Delhi, Mar 19: The nine per cent industrial growth for the current fiscal of 2005-06, as indicated by the advance estimates, may not fructify and the output growth may well remain below eight per cent, the prestigious Institute of Economic Growth (IEG) has said.

The IEG, in its monthly monitor, also expects the overall GDP growth to fall below 8.1 per cent as shown by the advance estimates done by the Central Statistical Organisation earlier.

Though inflation continues to remain subdued, largely due to fall in prices of edible oil and iron and steel, the inflationary expectations still persist, the monitor said.

It said the average industrial growth rate in the next three months would be about six per cent, to be impacted largely by the volatile growth in the exports. It also expects the exports growth for the next two months to be less than its average growth (around 12 per cent), and the high growth in the industrial output may not be sustained. Added to this external factor, rising domestic interest rates particularly to the real estate and slow growth in the core sector output might adversely affect the industry from the demand side.

Overall, the growth of IIP (Index of Industrial Production) for 2005-06 would be below eight per cent.

''The CSO's advance estimates for industrial sector shows overall industry to grow at nine per cent, which, in our view, seems to be at a higher side,'' the IEG monthly monitor said.

After a slow growth for two consecutive months, the industrial output rebounded in January 2006. For the period April-January the growth is at 8 per cent, which is less than last year's growth of 8.4 per cent. This growth is backed by 9.2 per cent growth in the manufacturing sector. From the use-based classification, capital goods output has registered a robust growth rate of 26.3 per cent while there is a decline in the growth of consumer goods to 7.2 per cent, compared to 15.2 per cent in the same period last year.

''We have been saying that the current industrial growth is majorly backed by the external demand besides other domestic factors. The volatile growth in the exports is expected to have adverse impact on the domestic industry. Since exports growth for the next two months are expected to be less than its average growth, the high growth in industrial output may not be sustainable in the next two months.'' The Development Planning Centre of the IEG also sounds a note of caution for Finance Minister P Chidambaram for his Budget for 2006-07. It said the budgeted figures for 2005-06 are based on the robust growth that India had achieved in the first three quarters of the current fiscal.

''It would not be wise to think that this trend would continue in the last part of 2005-06 and in the fiscal 2006-07 as well, particularly when there is some uncertainty regarding the sustainability of current industrial performance (in November and December 2005 the IIP growth was 6.1 per cent and 5.6 per cent respectively against the expectation of above nine per cent overall industrial growth for the whole year)''.

In the present Budget, it appears that the implicit assumption regarding GDP growth seems to be nearly eight per cent. As the recent Economic Survey pointed out that there are certain risks in the economy, particularly the inflation and interest rate risks, this asusmption regarding the GDP growth ''seems to be a bold and risky one''.

Despite the subdued rate of price rise, the inflationary expectations persist since the high world oil prices are yet to be passed on completely to the domestic consumers. ''Added to that the high money supply growth (above 15 per cent since September 2005) which is expected to be inflationary with a lag, also to some extent sustain this inflationary pressure''.

The IEG also expects the foreign exchange reserves to decline because of the widening trade gap which is already over 33 billion dollar. It said the forex reserves are expected to decline to 142 billion dollars compared to 143.1 billion dollar by middle of February 2006 and above 144 billion dollar in December, 2005.

UNI