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In line with the slowdown in economic activity forecast by the Central Statistical Organisation for the second half of the current fiscal, the data for industrial production in December show a significantly lower growth rate of 7.6% compared with 13.4% in December 2006. However, this is an improvement over the 5.3% growth recorded in November. Further, the data also show that consumer goods, whose slowdown has been a matter of concern, has turned in a healthy growth rate of 8.7% in December, higher than the cumulative growth rate of 5.8% in the first nine months of this fiscal year.

While economists see the industrial growth rate of 7.6% for December 2007 as a sign of the economy cooling, global credit rating agencies have a different take. Moody’s, for instance, has said it is above expectations and an indication of solid output level for the fiscal year so far. Slower, rupee-hit exports were expected to pull down industrial performance even more sharply.

India’s overall industrial growth rate for April-December has slipped to 9% as opposed to 11.2% for the corresponding period in 2006-07. Growth has slowed down across manufacturing, mining and electricity. Part of the slowdown in manufacturing, to 8.4%, can be attributed to a statistical quirk: the base effect of comparing December ‘07 growth with the spectacularly high growth of 14.5% achieved in December ‘06.

Basic goods have slowed down dramatically to 3.1% from 12.4% in Dec ‘06. The story is similar, though less severe, in the case of intermediate goods, where growth has been 7.2% against 12.7% in the corresponding month a year ago. The growth rate of 16.6% in capital goods maybe impressive in itself, but loses sheen when compared with the cumulative growth of 20.2% so far this fiscal and 26.2% achieved in December ‘06.

However, consumer goods, and the sub-segment of consumer durables, have a happy story to tell. Consumer durables have seen negative growth all through this fiscal except in April and October. In December, the growth rate turned positive, although marginally, at 2.2%. Still, this shines bright in contrast with the cumulative negative growth of 1.3% achieved so far.

Economists are of the view that several factors such as higher interest rates, slower consumer demand, slackening in exports due to the appreciating rupee and global slowdown have contributed to the lower IIP figures. The cut in interest rates, which have already kicked in, is expected to bring about a recovery, though with a lagged effect.

Crisil director and principal economist DK Joshi said, “The slowdown is in line with expectations. RBI’s tight monetary policy, aimed at curtailing the demand for money, impacted the consumer durables segment. Besides, the high base effect and slower consumer demand led to a further slowdown.”

One of the major sectors that has been consistently underperforming is two-wheelers. Two-wheelers, which have a high weightage in the consumer durable segment, have contributed majorly to the decline in this segment. Two-wheeler sales have declined 8% in April-January, against the corresponding period of last year.

Bajaj Auto general manager (marketing) Amit Nandi said, “The squeeze in availability of funds from banks and financial institutions, coupled with high interest rates, has curbed demand. The volume generating 100 cc segment is also declining, which has impacted total sales of the industry. Lack of new products in the market is also leading to declining sales.”

Consumer non-durables posted a growth of 10.6% compared to 13.5% in December 2006. Mining and electricity also put up a lacklustre performance during the month, recording growth rates of 3% and 3.8%, respectively, compared with 6.1% and 9.1% in December 2006.

Economists attribute the slowdown in capital goods to the high base effect, which has become more pronounced in December. “Slowdown in the capital goods sector is something that was not expected. This can be attributed to the high base effect, but if the trend remains in the months to come, it will surely be a matter of concern,” NCAER economist Sashank Bhide said.

Mr. Bhide said the slowdown indicates inability of companies to augment production capacity. “If this trend continues, it does not bode well for the growth potential of industrial production,” said.

Besides manufacturing, the slowdown in the infrastructure sector—which accounts for 26.9% of IIP—too contributed to the sluggish growth in December. “The fall in growth in core sectors like mining and electricity could be on account of full utilisation of existing capacity. Once the additional capacity is added, it would helping in stimulating production,” Mr. Joshi said.

Ernst & Young partner Kuljit Singh said, “The slowdown in electricity generation is because hardly any projects are getting commissioned, either in the private or public sector. It is also a consequence of faulty policies taken four to five years ago that did not encourage more investments into the sector. The slowdown is flowing from less than half of the generation targets being achieved in the Tenth Plan. This, however, may change in the next few years as several private sector projects are coming up along with development of ultra-mega power projects.”

The sector that bucked the trend was wood and wood products, which grew the highest among the industrial groups at 31.3%, primarily on account of the growth in the domestic housing and commercial market space.

“Our sales have gone up due to higher demand for wooden interiors and furniture from the housing and commercial sector,” Greenply joint managing director and CEO Saurabh Mittal said.

On the other hand, metal products and parts, wool, silk, manmade fibre textiles and non-metallic mineral products showed negative growth. Experts said these sectors, which are driven by exports, seem to be bearing the brunt of rupee appreciation.

As many as 13 of the 17 industry groups showed positive growth. For the April-December period, manufacturing growth worked out to 9.6% compared to 12.2% in the same period last year. During the nine-month period, mining grew at a better pace of 4.9% against 4.4%, but electricity growth went down to 6.6% against 11.2%.

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