Indian Industrial Output Shrinks, WPI Inflation Declines

February 15, 2013 Posted by India Briefing Reading Time: 3 minutes

Feb. 15 – In a worrying development, data from the Central Statistics Office (CSO) has revealed that India’s Index of Industrial Production (IIP) contracted by 0.6 percent in December, largely due to sluggish performance in the manufacturing and mining sectors. Compounding the issue, contraction of industrial production in November has been revised further down, from 0.1 percent to 0.84 percent. Additionally, consumer and capital goods, which are regarded most important for international investment, also suffered a sharp contraction.

Data from the CSO further revealed that from April-December IIP growth only expanded by 0.7 percent, compared to an increase of 3.7 percent for the same period in the previous fiscal year. Cumulative growth from April-December in the manufacturing sector, which constitutes approximately 75 percent of the IIP, similarly expanded only by 0.7 percent, compared to 4 percent in the same period a year before.

“What is clear is that any meaningful industrial recovery is eluding us. Demand destruction is far more well entrenched than we thought,” said Sujan Hajra, chief economist at a brokerage firm in Mumbai.

The contraction of the IIP for a second straight month in a row now casts doubt over Finance Minister P. Chidambaram’s belief that India is showing signs of economic revival. Chidambaram reacted negatively to the CSO’s statistics, claiming that they used dated data, and that they didn’t take into account India’s upward trending GDP growth.

“We can recapture the magic of 2004-08. The average growth was 8.5 percent during that period,” he said recently. “Why should we, without any reason, denigrate our own performance and record? I have no doubt in my mind that we will come out of the trough and we will climb back to a growth rate of between 6-7 percent next year.”

In a positive sign, India’s wholesale inflation has slowed down in January to a 38-month low. The wholesale-price index (WPI), India’s main inflation gauge, only rose 6.62 percent from a year earlier, compared with last month’s 7.18 percent increase.

This was a comforting reveal for policymakers, including Chidambaram. If the deceleration of wholesale inflation can be sustained, it will potentially create enough space for a further interest rate cut, spurring greater growth.

“The RBI will likely be cautious in easing,” said Jyoti Narasimhan, an economist at IHS Global Insight in Bangalore. “All eyes are on the budget to see measures to ease price pressures and spur the economy.”

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