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Industrial output falls by 5.1%; RBI may lower interest rates

New Delhi: Industrial output registered a negative growth of 5.1 per cent in October, lowest in over two years, mainly due to rising interest rate, high prices and global uncertainties, a development that may prompt the RBI to ease the interest rate.

The industrial output which had grown by 11.3 per cent in October last year showed the sharpest decline in last over two years when data released by the Government today said it fell 5.1 per cent in October 2011.

The decline in industrial production has mainly been on account of poor performance of the manufacturing and mining sectors, resulting from the twin impact of high interest rate and global slowdown.

In view of the negative factory output and moderation in inflation, especially food prices, the RBI may lower the key policy rates — which it has increased for 13 times since March 2010 — in its monetary policy review on December 16.

Describing the industrial output numbers as disappointing, C Rangarajan, Chairman of Prime Minister’s Economic Advisory Council (PMEAC), said, “somewhat lower growth in industrial production was expected, but not a negative growth.

“We certainly need to look at all our actions in order to provide situation in which the industrial growth rate is not only in the positive but it is respectably high.”

As regards the monetary policy, Rangarajan said, the RBI will have to look at what is happening to the inflationary trend. “If the inflation trend indicates a definite decline, then perhaps (reversal) of policy actions can be thought of”, he added.

Following release of the industrial output data, the BSE Sensex in the late afternoon trade declined by about 350 points.

The last time industrial production had seen de-growth was in June 2009 when it shrank by 1.8 per cent.

As per today’s data, while the mining sector output declined by 7.2 per cent in October, the fall was 6 per cent in case of manufacturing sector, which accounts for over 75 per cent weight in the index.

Mining and manufacturing grew 6.1 per cent and 12.3 per cent respectively during the corresponding period a year ago.

As per the data, industrial output growth moderated to 3.5 per cent in the April-October period this fiscal, as against 8.7 per cent in the same period last year.

Production of capital goods fell sharply by 25.5 per cent in October. The segment had grown by 21.1 per cent in the corresponding month of 2010.

Output of consumer goods also fell by 0.8 per cent during the month under review, as against a growth of 9.3 per cent in the corresponding month of 2010.

Furthermore, consumer durables production declined by 0.3 per cent, compared to a growth of 14.2 per cent in October last year.

During the month under review, output of consumer non-durables fell by 1.3 per cent. The segment had expanded by 5 per cent in October last year.

“The data shows weakening of the Indian economy… We see rate cuts in 2012 but there is a small chance of a cut this week,” Credit Agricole Senior Economist Dariusz Kowalczyk said.

“We believe that the Reserve Bank will keep its rates unchanged. They have to watch the headline inflation for some time and we think IIP de-growth will not continue in next few months although the rate of growth may be low,” Crisil Chief Economist D K Joshi said.

He said the IIP figures have been weak in recent months and industrial sector slowed down on account of high interest rates as well as on account of global factors.

“The 5.1 per cent de-growth in industrial production in October 2011 was considerably inferior as compared to the consensus estimates…Over the recent months, investment and consumption growth have displayed signs of a slowdown,” ICRA Economist Aditi Nayar said.

Industry body CII termed the IIP numbers as “serious disappointment to industry”.
“If allowed to continue, this (de-growth) would have serious consequences on employment and livelihoods.

“CII believes urgent measures are required to induce investments, including creating a shelf of bankable projects particularly in infrastructure… gradual roll back of interest rate increases, improve the fiscal situation which in trurn would help ease the effective rate of interest…,” CII Director General Chandrajit Banejree said.

He added that the industrial slowdown is taking very serious dimensions “and there is an urgent need to improve sentiments if the downward trend has to be checked.”

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