Thaindian News

New Delhi, Sep 12 (IANS) A sharp fall in capital goods production and overall manufacturing sector resulted in India’s factory output in July growing at its slowest pace in 21 months — 3.3 percent — compared to a year earlier.

The slower growth was much lower than expectations and sharply below the 8.8 percent growth registered in the previous month. With the RBI meeting Friday to review the monetary policy, all eyes will be on the central bank if it pays heed to the sluggishness in factory output.

According to data released Monday by the ministry of statistics and programme implementation, capital goods production fell sharply by 15.2 percent in the month.

The index of industrial production (IIP) had grown at a robust 9.9 percent in July 2010.

Manufacturing, which has a majority share in the index, grew at a slow 2.3 percent in the month under review, while that of the mining sector saw output rise by 2.8 percent.

Electricity generation, however, rose a robust 13.1 percent in July.

“The 2.3 percent growth of manufacturing in July is the lowest growth in last 21 months and the outlook looks indeed bleak for coming months. Capital goods have registered negative growth which is the lowest in last 24 months”, said Rajiv Kumar, secretary general, Federation of Indian Chambers of Commerce and Industry.

“The situation is indeed serious as both manufacturing and mining sectors’ growth has dipped significantly vis-à-vis last year and unless corrective policy actions are taken, we may enter the negative territory soon”, added Kumar.

The fall in industrial output will lend further strength to the arguments of India Inc that continuous rate hikes by the RBI were affecting growth.

The RBI has raised key interest rates 11 times since January 2010 to tame inflation.

Although, headline inflation still remains stubbornly close to double digits and food inflation last recorded for the week ended Aug 27 was at 9.55 percent.

“The June IIP number is an outlier in a general trend of slowing industrial activity. There are clear signs of activity slowing down in the domestic economy on top of an increasing risk of a global recession staring in our face,” said Jay Shankar, chief economist - director, Religare Capital Markets.

“In terms of policy action, even though it may be prudent for the RBI to pause now, we believe the RBI may actually go ahead with another 25 basis points rate hike, to keep its anti-inflationary stance intact, perhaps for the last time in the current cycle.”