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Slowdown fears deepen as IIP growth contracts

Reports state that the optimism exuded by the government of 7.5% economic growth this financial year on a better second half is ringing hollow, with industrial output contracting 5.1% in October. The contraction, seen after more than two years, was led by a 25.5% 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%. 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% fall, while machinery and equipment contracted 12.1%.

The indications were already there, though. Passenger car sales in the domestic market declined 23.77% 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 said that 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 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 Mr C Rangarajan is still hopeful of 7.5% economic growth this year, with agriculture and services expected to perform better. However, he does not rule out a 7.25% growth scenario.

Mr Rangarajan told Business Standard that “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 to 7.5% as agriculture will do better, services are doing well and manufacturing is not doing good but is expected to do better.”

The economy grew 7.3% in the first half.

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

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