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Triggering fears of a slowdown, industrial growth fell sharply to 5.3% this January compared to 11.6% in the same month last year. The index of industrial production (IIP), which showed some bounce in December with a 7.6% growth, slipped again due to sluggish consumer durables and capital goods.

The data come at a time when worries over a US recession are gaining momentum and global commodity prices are touching new highs.

Consumer durables, which have been slackening, moved into negative territory again—it was negative in September 2007 too. This was primarily due to a sharp fall in two-wheeler sales, thanks to the tight credit squeeze in the system.

But what comes as a surprise to many is the slowdown in capital goods, which have fallen sharply to 2.1% compared to 16.3% last year. Making things more difficult was the decline in intermediate and basic goods.

Incidentally, it is this fall that worries economists the most. “Growth in IIP is much lower than expectations. What came as a surprise is the steep correction in the capital goods segment,” said Crisil principal economist DK Joshi.

But the house is divided on whether there is an actual slowdown. Said CMIE chief economist Mahesh Vyas: “If you have grown in double digits for the last three years, you can’t drop to 2.1% just like that. This is not a fashion industry. It is not a consumer durable, it’s not even susceptible to seasons or monsoons. So, this seems to be an aberration,” he said.

The optimism is echoed by Bharat Heavy Electricals. Said the engineering major’s CMD K Ravi Kumar: “Main consumers of capital goods like power are growing at over 25%. We hope the quarterly figures would be in a comfortable zone.”

Prime Minister’s Economic Advisory Council chairman C Rangarajan too was optimistic that the economy could still close this fiscal with a 8.5-9% growth, though he was concerned that international crude oil prices could pressurise inflation.

Finance minister P Chidambaram has also said containing the inflation rate was the government’s top priority.

Overall, consumer goods maintained a healthy 7% growth rate, (given the higher base of 8.2% in January 07) driven by the sustained spend in consumer non-durables like FMCG goods. The better performance in this segment—it jumped 10.1% against last year’s 9.1%—has managed to offset the negative growth in consumer durables.

“The marginal slowdown in our sector is volume-led and one can attribute it to the prevailing component the industry is dealing with. There has been a steep rise in input costs whether it’s commodities, edible oils or packaging material. But the sector’s top-line growth will not be impacted,” Marico CEO (consumer products) Saugata Gupta said.

But consumer durables, which form a component of overall consumer goods, saw a negative growth of 3.1% compared to a 5.3% surge in the same month last year. Between April 2007 and January 2008, the average growth in the sector was only (-) 1.7%. This is largely due to the decline in two-wheeler sales. And with inflationary worries still looming, the central bank may not be in a hurry to cut rates.

Said TVS Motors senior sales vice-president, “The de-growth that the motorcycle industry is witnessing is largely due to lack of enough retail finance options for motorcycle buyers.”

And Budget sops may not be enough here. “Unless the retail finance situation improves, the motorcycle industry will see little impact of the excise duty cut,” said Hero Honda managing director Pawan Kant Munjal. As per latest Siam figures, motorcycle production dropped to 10% in February compared to last year.

A dip in two-wheeler financing is testimony to this. “Passenger car credit offtake has grown by 12%, commercial vehicles by 3% while two-wheelers have registered an 8% dip in figures. I do not think we can see a trend in one month,” said ICICI Bank vehicle finance head NR Narayanan.

Experts say budget measures, including the Cenvat rate cut and higher income tax exemption limit, will boost consumption in these sectors and give a fillip to the manufacturing sector. Said GlaxoSmithKline MD Zubair Ahmed:

“Whenever there is some instability or negative sentiment like a downturn in the stock market or political changes, people tend to defer purchases. But this is a temporary phenomenon and there’s nothing intrinsically shaky about the FMCG industry. We are optimistic about the growth prospects and this year’s Budget should also boost consumption.”

The usual suspects like manufacturing, mining and electricity did little to help turn around the IIP fall. While manufacturing decelerated to 5.9% (12.3%), mining and electricity dropped to 1.8% (7.7%) and 3.3% (8.3%) respectively.

Industrial growth eased to 8.7% in the first 10 months of this fiscal against 11.2% during the corresponding period of the previous fiscal. The economy is projected to grow by 8.7% in the current fiscal, as per the advance estimates of the Central Statistical Organisation (CSO).

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