IIP Growth Disappoints; Eye On Coming Months

Indian industrial production growth slowed sharply in December as capital investment remained weak, adding to pressure on the RBI to start cutting interest rates to help stimulate an economy that is headed for its slowest growth in three years.

Output from India's factories, mines and utilities increased 1.8 per cent from a year earlier, the slowest since October.

Economists had expected an increase of 3.4 per cent, a Reuters poll showed. The December figure compares with a rise of 5.95 per cent in November.

Describing the 1.8 per cent industrial output growth in December as "disappointing", India's Finance Minister Pranab Mukherjee expressed hope that the figures would show some improvement in the coming months.

"IIP is disappointing... I hope from the next couple of months it will start improving," Mukherjee told reporters in New Delhi.

Expressing a similar opinion, Prime Minister's Economic Advisory Council Chairman C Rangarajan said that the numbers are disappointing and added that investment sentiment would revive in the next three months.

"There are indications of revival in factory output in January-March quarter as mining sector would show improvement as coal output is expected to rise," Rangarajan said.

He said the GDP growth for the current fiscal is likely to be "a shade better" than 6.9 per cent estimated by the Central Statistical Organisation (CSO).

He said the growth for the next fiscal (2012-13) is likely to be around 7.5 per cent.

Slowing Growth
Industrial production growth has been slowing for two years on a sequential basis, the 3-month moving average of the data shows, and that momentum is now at its slowest since mid-2009

"The investment cycle has been hit and that story is still continuing; today's data is a reminder of the fact that we need some policy action to boost investment," said Anubhuti Sahay, senior economist at Standard Chartered Bank in Mumbai

"But this doesn't change the growth outlook for the year, or monetary policy expectations. The central bank will likely go by inflation data to decide on the timing of a rate cut."

The government, which released its growth estimates for the fiscal year ending March 31 earlier this week, cut its growth forecast to a three-year low of 6.9 percent.

Growth in the Indian economy, which grew 8.4 per cent in the year to March 2011, has been slowing as the euro zone crisis, the central bank's tight monetary policy, and government policy paralysis discourages investment.

Government bond yields slipped, stock prices turned negative and the rupee weakened after the data was released.

Mining production shrank 3.7 per cent from a year earlier, its fifth straight contraction, reflecting a host of regulatory and environmental approval issues plaguing the sector.

Electricity generation rose 9.1 per cent from a year earlier, slower than a 14.6 per cent rise in the previous month.

The data showed that investment remains anaemic. Capital goods production, a proxy for investment, shrank for the fourth straight month, contracting 16.5 per cent from a year earlier.

Pressure On RBI
With the cash-strapped government left with little fiscal headroom to encourage growth, the onus is on the Reserve Bank of India (RBI) to prop up the economy.

"Growth impulses are expected to remain weak through the next financial year. And along with the expected easing in inflation should provide the setting for RBI to cut rates." said Ashutosh Datar, an economist at IIFL in Mumbai.

The RBI is widely expected to begin cutting interest rates in the quarter beginning April 1 after a 20-month tightening cycle that ended in October last year.

Economists expect 100 basis points of cuts from the current 8.5 per cent in 2012, beginning with 50 basis points of cuts in the April-June quarter.

There are also some early positive signs on the economy.

India's manufacturing sector bucked the gloomy global trend, posting its strongest expansion in eight months in January, a survey of purchasing managers showed. Services grew at their fastest pace in six months.

Still, inflationary risks persist. Although the headline inflation, which slowed to a two-year low of 7.47 percent in December, is showing signs of peaking, non-food manufactured inflation, or core inflation, at 7.7 percent remains way above the central bank's comfort zone.

"The RBI will prefer to wait till it believes it has complete control over inflationary expectations," said Arun Singh, senior economist at Dun & Bradstreet in Mumbai.