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Factory output growth slows sharply in December

Industrial production increased a lower-than-expected 1.8 per cent in December versus 5.9 per cent in November last year. However, there is an expectation that the RBI will reverse its interest rate cycle as inflation shows signs of petering out.

twitter-logoShweta Punj | February 13, 2012 | Updated 10:44 IST

Shweta Punj
Shweta Punj
If there was another confirmation needed that India's growth story seems to have hit a speed breaker it came with the latest data on India's factory output.

India's factories worked much below capacity and churned out fewer cars, machines and other goods. Industrial output for the month of December slowed to 1.8 per cent versus 5.9 per cent in November last year. Growth slid to 3.1 per cent in core sectors including steel, cement, fertilizers, crude and refinery from over 6 per cent in November.

Manufacturing growth slowed to 1.8 per cent, capital goods production declined by -16.5 per cent. The only segments where the slip was not as dramatic were the low cost consumer goods and non-durable consumer goods. Both grew at 10 per cent and 13.4 per cent against 13.1 and 14.8 per cent respectively.

The disappointing numbers were much below expectations, since most indicators were suggesting an improvement for December.  The HSBC Manufacturing Purchasing Managers' Index (PMI) jumped to an eight month high of 57.5 per cent in January from 54.2 per cent in December indicating new orders and suggesting that factory output could do better. In fact, car sales in December grew 8.5 per cent to 1.59 lakh units, and the Society of Indian Automobile Manufactures raised the forecast for car sales in FY13 to 11-13 per cent.

It has been a triple whammy for Indian businesses - high interest rates, escalating input costs and contracting demand have pushed businesses to a corner. The Reserve Bank of India hiked interest rates 13 times between March, 2010 and October, 2011 to curb inflation which remained stubbornly high.

However, there is an expectation that the RBI will reverse its interest rate cycle as inflation shows signs of petering out and falls to 6.5 per cent. Inflation remained uncomfortably high at 8.23 per cent in January.

The fall in factory output further exacerbates India's growth pangs. The government recently and for the first time admitted that growth could slip to 6.9 per cent this year. India's trade deficit widened to a three-month high of $14.7 billion in January. Fiscal deficit has reached 92.3 per cent of the 2011-2012 target.

The Prime Minister's Economic Advisory Council is expected to release their growth estimates for FY13 on the 22 February.

The finance minister will present the budget on March 16, and this budget could be one of the most crucial ones for his ministry given the general sentiment of policy paralysis.

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