Industrial growth hits 20-month low at 1.6%

INDIAS industrial growth slowed to a 20-month low in December because of a sharp contraction in the capital goods sector and the base effect of last years high growth.
The factory output growth,as measured by the Index of Industrial Production (IIP),rose just 1.6% in December from the year before,data released on Friday showed.
But experts flagged inflation as a bigger concern,tipping the central bank to lift rates further to curb demand even at the risk of depressing investment activity further.
Production of capital goods contracted 13.7% year-onyear after rising 12.8% in November.Manufacturing output grew 1% from the year ago compared with 3.2% in the previous month.
IIP numbers are very unfortunate and it is disappointing, Finance Minister Pranab Mukherjee said.But it was on expected lines as it (the IIP) is on yearly basis.
Stock markets largely ignored the IIP data with the benchmark Sensex rebounding to close with a gain of 265 points.Bond yields remained mostly unchanged.
The data released on Friday may also have been depressed by the comparison with the whopping 18% growth in industrial output in December 2009.
Output at mines grew 3.8% year-onyear as against 7.4% in November.Electricity output was up at 6% compared with 4.6% in the previous month.
But inflation seems to be a bigger concern now.While there is deceleration in growth,inflation is the bigger problem, Citi economist Rohini Malkani said in a note on Friday.
Between April and December 2010,manufacturing rose 7.7% against 8.7% in the year-ago period.This could fall further on the high base effect and if interest rates are increased again.
The drop in manufacturing output could push down,albeit marginally,the overall economic growth for 2010-11.
This (decline) could impact the contribution of the Central Statistics Offices recently-released 8.6% GDP estimate for FY11,with agriculture likely to offset lower industry, Malkani said in her note.
However,Goldman Sachs economists Tushar Poddar and Vishal Vaibhaw disagreed.Lower industrial production data from the past two months show that activity is moderating, they said in a note.