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Industrial growth drops to 20 months low

New Delhi: Industrial expansion plunged to a 20-month low of 1.6 per cent in December,causing a blip in India`s growth track, but policy makers remained unfazed on the prospects of robust GDP numbers for the current fiscal.

Though the December factory output growth has somewhat "disappointed" Finance Minister Pranab Mukherjee, experts are not surprised in the backdrop of a very high expansion a year ago.

The Index of Industrial Production (IIP) had grown by 18 per cent during the same period last year, making it a daunting challenge to maintain the expansion momentum this fiscal due to the high base.

Industrial growth during April-December this fiscal stood at 8.6 per cent, unchanged in comparison to the corresponding period of the previous year, official data released here today showed.

The "disappointing" numbers came just days after the Government`s prediction of "encouraging" 8.6 per cent economic growth this fiscal, against 8 per cent in 2009-10.

Meanwhile, the IIP for November has been revised upwards to 3.6 per cent from the earlier estimate of 2.7 per cent.

The manufacturing segment, which has a weight of about 80 per cent on the IIP, managed to grow barely by one per cent in December from a huge 19.6 per cent a year ago.

The capital goods sector, reflecting investment, contracted to (-)13.7 per cent in December, 2010 versus impressive 42.9 per cent expansion a year ago.

"Monthly and weekly numbers do not reflect correct picture. Therefore you shall have to take the whole year into account. Let us see how it reflects in the annual picture," Finance Minister Pranab Mukherjee said though, he termed the December numbers as "very unfortunate and disappointing".

Similar views were expressed by Planning Commission Deputy Chairman Montek Singh Ahluwalia who said month-on-month fluctuations in IIP should not be a cause of concern as the economy, as a whole, was on a healthy growth track.

"In order to achieve 8.5 GDP growth, 8 per cent industrial growth for the whole year (2010-11) is enough," Ahluwalia said.

Rajrishi Singhal, Head (Policy & Research) of Dhanlaxmi Bank said the 1.6 per cent growth should be seen in the context of a very high base of 18 per cent expansion recorded in December 2009. However, he was concerned over deceleration in the capital goods sector.

"Decline in capital goods manufacturing shows that investments is missing. There is need to step up investments in the infrastructure sector for 8.5 per cent growth," Singhal added.

Meanwhile, Mining growth fell to 3.8 per cent in December, from 11.1 per cent in the same period of the previous year.

Electricity generation grew by 6 per cent in the month, compared to 5.4 per cent in December, 2009.

In terms of industries, 12 out of 17 industry groups achieved positive growth in the last month of 2010.

The data also revealed that consumer non-durables production contracted by 1.1 per cent in December.

Industry chamber FICCI, said the large base effect may have been one of the causes for sharp slowdown of the manufacturing sector.

Besides, rising interest rates on tight monetary policy and partial exit from the stimulus could be responsible for the declining trend.

"We add a cautionary note on further tightening of monetary policy and exit from the stimulus," chamber President Rajan Bharti Mittal said.

Ahead of the Union Budget, it is apprehended by the industry that the Finance Minister may roll back some of the stimulus measures which were announced in 2008 and 2009 during the global financial crisis.

Assocham felt that high inflation could have impacted the industrial growth.

"Indian industry has been facing hyper inflation conditions for over a year," Assocham President Dilip Modi said suggesting restoration of of some of fiscal stimulus incentives which were withdrawn in 2010-11.

Research firm ICRA said a continuing high base effect is likely to keep IIP growth low over the coming few months.

ICRA`s economist Aditi Nayar, however expects that like November, the Decembers` IIP too would be revised upwards.

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