Industrial growth down to 18-mth low of 2.7%,case for stimulus

New Delhi, Jan 12 (PTI) Industrial growth plunged to an18-month low of 2.7 per cent in November, 2010 from over 11per cent recorded in the previous month, which may make astrong case for continuation of stimulus in the Budget.

The sharp deceleration in November figures was because ofjust 2.3 per cent growth in manufacturing, which constitutearound 80 per cent in the Index of Industrial Production(IIP) that measures the expansion in factory production.

The part of decline in industrial growth could be due tohigh base effect of 11.3 per cent in November, 2009, butFinance Minister Pranab Mukherjee refused to take cover behindthis statistical technicality.

"Last time, if you have noticed that in November lastyear it(IIP) was very high, so base effect is also there, butthat is no consolation," he said.

However, the Reserve Bank is likely to up policy rates asinflation has assumed bigger concern, analysts said, eventhough industrialists cautioned the central bank from takingsuch a step.

The Finance Minister promised corrective action to pushup industrial growth. "We shall have to look into and takecorrective measures so that IIP numbers revive in theremaining four months," he said.

Yesterday, industrialists met the Finance Minister forpre-budget interactions and pitched for retaining stimulus.

They exuded confidence later that Mukherjee may agree to theirdemands.

Yes Bank chief economist Shubhada Rao said,"I thinkstimulus will continue."

Mining output registered a growth of six per cent inNovember, against 10.7 per cent recorded last year. However,Electricity generation rose by 4.6 per cent from 1.8 per cent.

Within manufacturing, consumer non-durable goodsproduction contracted by six per cent in November, 2010, whileconsumer durables rose by just 4.3 per cent against a whopping36.3 per cent in November, 2009.

Capital goods, which is required for future expansion ofindustry, expanded by 12.6 per cent in November over 11 percent a year ago.

With this, indutrial growth stood at 9.5 per cent duringthe first eight months of this fiscal, against 7.4 per cent ayear ago.

As many as nine out of 17 industry groups registered anegative growth in November, 2010.

Economists expect RBI to nonetheless up policy rates atits January 25 quarterly policy review to fight inflation.

"Inflation is a concern. We expect RBI to go for monetarytightening. RBI does not go by month-to-month data," Crisilchief economist D K Joshi said.

In fact, the plan panel also does not seem to beperturbed by sharp dip in industrial growth in November. MOREPTI KKS BSP IND RAH TVS

"I am not concerned about low November number. There is month to month volatility. We are on track as far as GDPgrowth is concerned."

The sharp dip in industrial growth in India is all themore concerning when viewed from the factory production inChina, which rose by 19.2 per cent in November, 2010.

However, industry voiced views against RBI''s any move totighten monetary stance later this month, saying that any hikewould dent factory production further.

Industry chamber CII said it is disappointed with thesharp moderation in industrial production.

"This should make the RBI more cautious about aggressivetightening at its forthcoming policy meet," the chamber said.

CII advised RBI that inflation is high because ofexpensive food items and should be tackled through supply-sidemeasures.

"Concerns on inflation should be tackled on the supplyside, given that it is being driven by a limited set of fooditems where bottlenecks in distribution are the root cause,"the chamber added.

Food products output showed a decline of 0.7 per cent inNovember, 2010. Though, it reflects only processed food items,shortage in supply of food items is one of the reasons forthis decline.

Food inflation has surged to over 18 per cent for theweek ended December 25.

Rise in inflation and dip in industrial production couldhave adverse impact on the economy, though Finance MinisterPranab Mukherjee said he does not like to arrive at anypremature conclusion.

"If IIP goes down and inflation goes up, it will have anadverse impact, but I am not coming to any prematureconclusion," Mukherjee said.

The Reserve Bank has already raised policy rates sixtimes last year, but pressed a pause button at its Decemberpolicy review.

However, the central bank had clearly stated that thepause was resorted to because of shortage of cash in thesystem and should not be interpreted as reversal of tighteningmonetary policy, since inflation is a major area of concern.

The sharp volatility in IIP numbers could be gauged fromthe fact that industrial growth declined sharply to 6.91 percent in August from 15 per cent in July, and then further to4.4 per cent in September. It again rose to over 11 per centin October and now November data showed sharp dip in numbers.

Rao said other data along with IIP data has to beanalysed to come to a conclusion. If one sees exports figures,PMI data -- they all show a moderation. .

As far as volatility in IIP data is concerned, the government is itself seized of the matter, Rao said.

Sharp decline in industrial figures, however, may notimpact overall growth much, since agriculture production andservices sector are robust, said Joshi.

The government is expecting up to over 9 per cent growththis fiscal, the first half of which has already seen 8.9 percent expansion in GDP.

Surprisingly, stock markets, which was under bearishpressure for quite some time, were not impacted by the dismalIIP numbers. Though it erased earlier gains in mid-session,equity benchmark Sensex was up over 230 points.

As far as volatility in IIP data is concerned, thegovernment is itself seized of the matter, Rao said.

Sharp decline in industrial figures, however, may notimpact overall growth much, since agriculture production andservices sector are robust, said Joshi.

The government is expecting up to over 9 per cent growththis fiscal, the first half of which has already seen 8.9 percent expansion in GDP.

Surprisingly, stock markets, which was under bearishpressure for quite some time, were not impacted by the dismalIIP numbers. Though it erased earlier gains in mid-session,equity benchmark Sensex was up over 230 points.