India's Industrial Output Contracts 0.6% in December

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By Jerin Mathew | February 12, 2013 8:18 PM EST

India's factory output declines in December

India's industrial output declined unexpectedly in December on lower demand and weak investment, underlining the inherent sluggishness in the economy, which is set to grow at the weakest pace in a decade.

The index of industrial production (IIP) in December fell 0.6 percent year-on-year, due primarily to a contraction in manufacturing and mining sectors and lower production of capital as well as consumer goods, India's Central Statistics Office (CSO) said.

The reading compares to a revised 0.8 percent drop in November and economists' expectations for a 1.1 percent increase.

Manufacturing output, which has a 75 percent weight in the index of industrial production, declined 0.7 percent from a year earlier in December, as 12 out of the 22 industry groups in the sector experienced negative growth during the month. Mining output shrank four percent in December.

Capital goods production shrank 0.9 percent and consumer goods production declined by 4.2 percent.

India's industrial output has contracted in seven of the last 10 months, amid a weak investment environment due to the central bank's aggressive monetary policy stance and the government's slow pace of progress in economic reforms.

Being pressurised by the government and industry groups, the Reserve Bank of India reduced its policy interest rates by a widely expected 25 basis points on 29 January to boost economic growth. Nevertheless, the latest data suggests that more rate cuts from the central bank are necessary for the economic recovery.

At the same time, the central bank also has to take into account the rising inflation in the country. Consumer price inflation inched up to 10.79 percent in January from 10.56 percent a month ago, according to other data released by the CSO.

Last week, CSO projected the economy to grow at five percent, the slowest pace in a decade, in the fiscal year ending in March. The finance ministry argued that the office was wrong with the estimate and the country would record a 5.5 percent growth rate.

"This is yet another indication that while things could have bottomed out, the past recovery is considerably far away. High inflation is impinging on purchasing power and so industrial growth is slowing, while the government is clamping down on expenditure which is certainly not helping growth," said Jyotinder Kaur, an economist at HDFC Bank.

"Despite incremental efforts we are still staring at weak growth print. We expect rate cut in March as growth is consistently surprising on the downside while pace of CPI (consumer price inflation) has stabilised."

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