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Business News/ Home-page / Factory output down 0.4%, first in 15 years
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Factory output down 0.4%, first in 15 years

Factory output down 0.4%, first in 15 years

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New Delhi: India’s economy could expand at a much lower rate than estimated with data released on Friday showing that industrial output in October contracted by 0.4%, the first time this is happening in 15 years, because of a decline in both domestic and external demand.

Industrial output grew 12.2% in October 2007.

The sharp fall is likely to increase pressure on the government and the Reserve Bank of India (RBI) to undertake another round of policy measures to boost domestic demand.

Also See FREE FALL (Graphic)

Data released by the Central Statistical Organisation (CSO) on Friday showed that in the first seven months of this fiscal year (April-October), the Index of Industrial Production (IIP) grew 4.1% compared with 9.9% during the same period a year ago.

The output of the manufacturing sector, which accounts for around 80% of IIP, shrank 1.2% in October, while those of the electricity and mining sector rose 4.4% and 2.8%, respectively. And while the output of intermediate goods and consumer goods companies fell, those of companies in the basic and capital goods sectors registered weak growth.

Economists here do not expect the factory output numbers to get better in a hurry.

“Industrial production may somehow perform better in coming months. But for a country like India, any sub-5% growth in industrial output is pathetic. Industry should grow at around 9-10%," said Dharmakirti Joshi, principal economist with credit rating agency Crisil Ltd. His estimate of industrial output in 2008-09 is 5%.

Also See BASE EFFECT (Graphic)

Samiran Chakraborty, chief economist of ICICI Bank, said the poor performance in IIP in October has been magnified due to the unfavourable base effect, a reference to the fact that the index is measured year-on-year and was at a high last October. “It is possible that the November IIP number would benefit from a somewhat positive base effect and for the rest of the year we could anticipate some trickle-down impact of monetary and fiscal stimulus. However, it is unlikely that a sustained industrial revival will take place in an era of global financial constraints and growth recession," he added.

“Given poor credit availability and high interest rates, demand conditions will not improve. That problem remains," said Siddhartha Roy, chief economist, Tata group.

The slowdown in exports too has added to the fall in demand, especially in businesses such as textiles.

Data from the commerce ministry shows that exports fell 12% in October, the first time this is happening in five years.

Initial indications are that November, too, may be a bad month for industrial production. Passenger car sales declined 19% in November, the most in at least five years, with tighter lending by banks and a slowing economy hurting demand.

Goldman Sachs economist Tushar Poddar said in a statement: “Preliminary exports data point to another month of negative growth. We therefore expect overall activity to be sharply lower in the second half of FY09, after growing by 7.8% in the first half. Our estimate for GDP growth remains below consensus at 6.7% y-o-y (year-on-year) for FY09 with further downside risks, and 5.8% for FY10."

The World Bank said on 10 November that the Indian economy would grow 5.8% in calendar 2009.

Economists expect more monetary easing by RBI to boost domestic consumption through lower interest rates. Though the central bank has aggressively cut policy rates since October, high deposit rates and uncertainties have prohibited private commercial banks from reducing interest rates.

“There is scope for further monetary easing, but little scope for more fiscal measures. The central bank may further cut repo (the rate at which it releases money into the system) and reverse repo (the rate at which it takes out money from the system) rates by 50 bps (basis points) before the January policy review," said Joshi. One basis point is one hundredth of a percentage point.

RBI governor D. Subbarao recently warned that India faces a period of “painful adjustment" after the global financial crisis froze credit markets in October, further weakening an economy struggling with high borrowing costs. Subbarao said the bank’s growth forecast for 2008-09 was likely to be cut from 7.5-8% in its January policy review. Late last week, India joined the ranks of countries that have provided a fiscal stimulus to the economy by announcing its own, worth around Rs32,000 crore. The move came in the wake of another effort by RBI to make easier credit available for companies and individuals by reducing its policy rate.

Reuters and Bloomberg contributed to this story.

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Published: 13 Dec 2008, 12:30 AM IST
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