For first time in two years, industrial output shrinks

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High interest rates, high cost of investment and tepid export demands impacted India’s industrial output, as index of industrial production (IIP) contracted 5.1 per cent in October, for the first time in more than two years, prompting the government to call a meeting of industrialists next week to discuss the issue.

The fall in IIP also saw BSE India Sensitive Index shed 343 points or 1.12 per cent, eroding investor wealth by nearly Rs 3 lakh crore. The rupee hit an all-time low of 52.85 to a dollar. The last time, industrial production growth had shrunk by 1.8 per cent was in June 2009.

Capital goods, manufacturing and mining sectors pulled down growth in the IIP, government statement showed. Production of capital goods fell sharply by a whopping 25.5 per cent in October, while the mining sector output declined by 7.2 per cent, the fall was 6 per cent in case of manufacturing sector, which accounts for over 75 per cent weight in the index.

Mining and manufacturing grew 6.1 per cent and 12.3 per cent respectively during the corresponding period a year ago. The fall in capital goods production was evident in the wake of a depreciating rupee at 52 per dollar and high interest rates which have pushing the cost of new investment. The contraction in industrial output spread across the sector showed both investment and consumption in the economy have stagnated.

Soon after the release of IIP data, government issued a statement saying sharp decline in Index of Industrial Production and particularly in the manufacturing are engaging government’s attention at the highest level. Commerce and Industry Minister Anand Sharma will hold government-industry consultation on the issue on December 19 after his return from WTO Ministerial.

Output of consumer goods also fell by 0.8 per cent during the month under review, as against a growth of 9.3 per cent in the corresponding month of 2010. Consumer durables production declined by 0.3 per cent, compared to a growth of 14.2 per cent in October last year.Production of consumer non-durables fell by 1.3 per cent against by 5 per cent expansion in October last year.

India Inc reacted sharply and urged the government to push investments and the RBI to ease ineterst rates. “RBI should immediately bring down the interest rates so as to stimulate investments and revive consumer durable demand. Also, it is high time that government reintroduces investment allowance and restores the fiscal stimulus by making the necessary fiscal space,” said Rajiv Kumar, secretary general, FICCI.
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