Domestic investment recovery remains frail, says Pranab

On the back of a bundle of indicative woes afflicting the economy such as high inflation, widening current account deficit and a depreciating rupee that the government is yet to effectively address, has come a dismal set of IIP (index of industrial production) numbers depicting the sorry plight of the manufacturing sector at the end of fiscal 2011-12.

The IIP data released by the Central Statistics Office (CSO) here on Friday revealed that for the first time in five months, industrial production contracted 3.5 per cent in March, 2012, as compared to a robust growth of 9.4 per cent achieved during the same month a year ago.

What came as a further surprise was the fact that the IIP's foray into negative territory at the fag end of the fiscal year was preceded by a positive growth of 4.1 per cent in February, which is a clear reflection of a drying up of the investment tap, ostensibly owing to India Inc.'s perception of interest rates being still too high.

The end result is that, far from showing any signs of industrial recovery during the last month of the fiscal year, 2011-12 has ended with a measly growth of 2.8 per cent as compared to an impressive expansion of 8.2 per cent achieved during the previous fiscal.

A sector-wise analysis of the IIP data shows that primarily responsible for the dismal performance was the capital goods segment owing to a sharp drop in fresh investment. Output of this segment contracted by a hefty 21.3 per cent in March this year as compared to a healthy growth of 14.5 per cent posted for the same month last year.

As a result, the manufacturing sector, as a whole, which has a share of nearly 75 per cent in the IIP basket, also shrank by 4.4 per cent during March, 2012, as against a robust increase of 11 per cent in the same month a year ago. Evidently, the drop in output was consequent to a number of factors such as tepid demand at home and a slack in the export market coupled with a high cost of credit and raw material prices.

Commenting on the factory output numbers, Finance Minister Pranab Mukherjee said: “The IIP figures are disappointing ... Domestic investment recovery remains frail. Continued weak global business sentiments are also adversely impacting recovery in domestic private investment. Though RBI's monetary stance has been reversed in last policy announcement, it will take some more time for interest costs to come down.”

The other sectors in the IIP basket hardly fared any better. Mining output fell by 1.3 per cent in March this year as compared to its holding in positive zone with a growth of 0.4 per cent in the same month of 2011. Electricity generation saw a poor growth of 2.7 per cent in March as compared to a 7.2 per cent increase in the year-ago period.

The consumer goods sector also witnessed a dismal output growth of 0.7 per cent during the month as compared to a robust expansion of 13.2 per cent in the a year-ago period. In this also, the consumer durables segment faced a deceleration in growth to a measly 0.2 per cent in March as compared to a healthy 14.9 per cent increase in the same month a year ago.

Overall, in terms of use-based industry groups, only 10 out of 22 segments in the manufacturing sector showed positive growth during March 2012.

To address the problem of industrial contraction, even as CII Director General Chandrajit Banerjee stressed the need for coordinated action by the government and the Reserve Bank of India (RBI) by way of some key reforms and a cut in interest rates, Planning Commission Deputy Chairman Montek Singh Ahluwalia felt that efforts should be made to induce industrial recovery by boosting demand and not by a offering a stimulus package to the industry.

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