New Delhi: India’s factory output growth slumped to 1.8% in December as investment demand contracted for the fourth consecutive month, reinforcing the case for the Reserve Bank of India (RBI) to start cutting interest rates. With the exception of October, when the Index of Industrial Production (IIP) contracted 4.7%, growth is the slowest since April 2009, when factory output expanded by a mere 1.1%.

Due to the volatile nature of IIP, analysts often prefer to look at the three-month average than the monthly industrial production data. Numbers released by the Central Statistics Office (CSO) show that during the fiscal third quarter (October-December), factory output rose 1%, down from 8.6% in the same period a year ago.

Finance minister Pranab Mukherjee conceded that the IIP data was disappointing. “I hope from the next couple of months, it will start improving,” he said.

Planning Commission deputy chairman Montek Singh Ahluwalia said the IIP numbers are expected to bottom out in the third quarter and revive in the fourth (January-March). “I thought the third quarter would be a kind of bottoming-out quarter. We have to see whether that really works out,” he said.

The latest number served as one more confirmation of a slowdown in the pace of growth in Asia’s third largest economy. India’s economy is now pegged by the government and RBI to grow 7% in the year ending March, compared with 8.4% growth in the last fiscal and down from earlier estimates of 7.5%.

CSO will release economic growth data for the third quarter on 29 February. Advance estimates of gross domestic product (GDP) released earlier this month for 2011-12 by the statistics department showed industrial production is expected to grow 3.6% in the full year; in the first nine months (April-December) of the fiscal, IIP rose 3.8%.

The CSO data showed the economy may grow 6.9% in the year to 31 March. During the first half of the year (April-September), the economy grew 7.3%, implying CSO expects the economy to expand 6.5% in the second half.

In December, mining production contracted for the fifth consecutive month amid regulatory and environmental hurdles, while manufacturing, with a 75.5% weightage in the index, grew 1.8%. Electricity production grew by a robust 9.1%.

Production of capital goods—an indicator of investment demand—contracted 16.5% in December and 2.9% cumulatively in the first nine months of the year. A relative stagnation in structural reforms, combined with a series of confidence-denting corruption scandals, has impeded capital spending—visible in slowing foreign direct investment flows and declining domestic business confidence.

The external volatility arising from the deepening debt crisis in Europe has only added to the uncertainty.

The cost of funds for companies has also gone up due to 13 rate hikes by RBI since March 2010 as the central bank attempted to cool persistently high inflation. RBI last month cut the cash reserve ratio, the amount banks need to park with it, by half a percentage point to 5.5%, while keeping policy rates unchanged.

Citigroup India economists Rohini Malkani and Anushka Shah said in a report on Friday that they maintain their view of a minimum 100 basis points cut in the repo rate by RBI in 2012, with the first cut coming either in the 15 March or the 17 April policy reviews.

“While the IIP numbers are disappointing, this appears to be factored in the government’s recently released 6.9% advance GDP estimates for FY12,” the analysts wrote.

Given that there are signs of a plateauing out of rural consumption, India needs concerted policy measures at all levels to support growth at 7% levels, they said.

While a decline in wholesale price-based inflation, which stood at 7.47% in December, has raised hopes that RBI will start its rate-cut cycle, the central bank has cautioned that in the absence of credible fiscal consolidation, it will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending.

“The Union budget must exploit the opportunity to begin this process in a credible and sustainable way,” RBI said in its quarterly monetary policy review last month.

Devendra Pant, director of Fitch Ratings India, said while IIP data suggested a demand slowdown, future monetary policy action would largely depend on the movement of non-food manufacturing inflation. Core inflation, or non-food manufacturing inflation, moderated to 7.7% in December from 8% a year ago.

Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, said if one discounted the volatile capital goods segment, growth in industrial production was not too disappointing.

IIP, excluding the capital goods segment, grew 4.35% in December compared with 7.01% in November, Pan said. The impact of a higher IIP base of 8.1% a year ago also affected the December IIP, he added.

“Expenditure-side data also shows robust growth in consumption,” he said. Consumer goods production grew at a robust rate of 10% in December compared with 3.5% growth a year ago on the back of 13.4% growth in non-durable consumer goods.

Going ahead, Pan said although industrial growth may have hit the floor, conditions are not conducive for a V-shaped recovery, in which a period of decline in growth is followed by a strong rebound. “It will be like a rocking boat floating here and there instead of climbing up,” he added.

PTI and Reuters contributed to this story.

asit.m@livemint.com

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