Industrial output in August grew at the slowest pace in 15 months at 5.6 percent, nearly half of last year, disappointing the government that was betting on domestic consumption to drive the economy.
Manufacturing sector, which accounts for 80 percent of the factory ouput numbers and a key indicator of consumer demand, saw growth slip to 5.9 percent from 10.6 per cent in August, 2009.
"(The trend is) a little disappointing. Let us see how it fares in annualised terms," Finance Minister Pranab Mukherjee said in his comments on the sharp fall in industrial output growth.
Growth in capital goods -- used by the manufacturing segment -- was a negative 2.6 percent in August compared to a 9.2 expansion in the year-ago period.
The poor showing drew immediate calls from the industry against any further increase in key policy rates by the Reserve Bank, which is slated to review its monetary policy on November two.
The RBI has increased policy rates five times this year to cool inflation, following which the rate for its key short-term lending (repo) stands at 6 per cent and borrowing (reverse repo) at 5 percent.
India Inc believes the deceleration was owing to the tight monetary policy stance that has pushed up interest rates for corporates, as well as for retail customers, most of whom rely on loans or credit to buy auto or other consumer durables.
The disappointing industrial output numbers triggered a huge sale on the bourses, as investors booked profits, pulling down the benchmark Sensex by nearly 225 points in intra-day trade. The losses were curtailed to 137 points at close.
Mukherjee, though disappointed, asserted that the "Indian economy is on the path of robust growth led by increased investment and capital inflows, stronger industrial output and rising aggregate demand."
The Finance Minister expects annual industrial growth to be around 12-13 percent, which could push economic growth to 8.5 percent or more. After over 9 percent growth for three years till 2007-08, GDP expansion slipped to 6.7 percent in 2008-09 post the global financial crisis.
The last time factory output growth was slower was in May 2009 (2.7 percent).
Mining sector output decelerated to 7 percent from 11 percent, electricity generation to 1 per cent from 10.6 percent.
"...the RBI should not raise policy rates any further as it could have a negative impact on consumer demand as well as corporate investment and thereby slowdown economic growth," CII said in a statement.
Industry chamber Ficci too said any further hike in interest rates could impact consumer durables and automotive sector.
"Negative growth in key sectors like capital goods, apparels...is indeed a cause of concern and with appreciation in Rupee and hardening of interest rates, the growth of manufacturing sector may be significantly affected," Ficci secretary general Amit Mitra said.
The central bank will have to draw a balance between the need to check prices, as inflation is still high at 8.5 percent, and push up economic growth.
Commenting on the IIP numbers, RBI Governor D Subbarao said, "We will study (IIP numbers). I cannot make a comment (just yet)."
The only sector that showed a positive trend in August was consumer durables which improved to 26.5 percent from 24.7 percent in August last fiscal.
Further, July IIP was revised upwards to 15.2 percent from 13.8 percent in the provisional estimates.
Finance Secretary Ashok Chawla said, "It (the trend) is purely a cyclical movement. Sometimes it goes up, sometimes (it) goes down...We need to watch."
On decline in capital goods production, India's chief statistician TCA Anant said, "It is very difficult to predict a trend based on month-on-month number. Capital goods production always comes with a lag and is difficult to say that there is any slowdown.
Manufacturing growth is good on the broader trend. This kind of variation takes place."
Consumer non-durables, mainly fast moving consumer goods (FMCG), recorded a negative growth of 1.2 percent, as against expansion of 6.1 percent in the same month last year.
Of the 17 industry groups, as many as 14 have shown positive growth during the month of August.
Meanwhile, the industrial expansion figure for July was revised upwards to 15.2 percent from the earlier estimates of 13.8 percent.
Industrial growth for the first five months of this fiscal stood at 10.6 percent in comparison to 5.9 percent growth in the same period a year ago.
According to Standard Chartered Bank economist, Anubhuti Sahay, "GDP growth and industrial output for the fiscal would be in line with projection...going forward industrial output is expected to moderate due to high base effect."
