The Telegraph
Tuesday , July 13 , 2010
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Industry growth slows

New Delhi, July 12: Industrial output expanded 11.5 per cent in May, the eighth straight month of double-digit growth.

However, the growth was considerably lower than April when production grew at 16.5 per cent, revised downwards from 17.6 per cent earlier.

The drop in industrial production in May is because of the sharp decline in capital goods growth, which fell to 34.3 per cent from 72.8 per cent in April.

Mining grew 8.7 per cent, manufacturing rose 12.3 per cent, and electricity was up 6.4 per cent. Consumer goods grew 8.2 per cent compared with 14.5 per cent in April. May’s IIP number is the lowest this year.

“Nobody should expect that manufacturing will continue to grow at abnormally high numbers for a long time to come. There are capacity constraints,” finance secretary Ashok Chawla said when asked about the reasons for the lower growth rate.

“Whatever output lag there was in the economy had been filled and the manufacturing sector is now showing the kind of average secular growth which continues to be good and will be favourable for the economy,” he said.

Economists said the slower growth in May would not have any bearing on the RBI strategy. The central bank will announce its monetary policy on July 27.

“I do not think the current IIP figure will have any effect on the RBI’s monetary policy. The RBI will continue to follow its cautious approach to monetary tightening. The May numbers are a precursor to industrial growth returning to a more sustainable level. Expansion from now on will again be at a more moderate double-digit figure,” said D.K. Joshi, economist with rating agency Crisil.

Analysts said the RBI might go beyond the 25-basis-point hike in repo and reverse repo rates made on July 2 to tighten its policy further in the wake of high inflation.

Inflation gathered pace from late last year. In May, the wholesale price index rose 10.2 per cent from 1.4 per cent a year earlier.

Besides high food and fuel prices, strong consumer demand was another reason for the price spike.

Sonal Varma, economist with Nomura, said, “In the next few months, we are likely to see much weaker IIP growth numbers. I think a 25-basis-point rise in the July 27 policy looks likely. Although it (IIP data) is below expectations, it is still a decent number. I do not think policy expectations will change much as inflation is still a concern.”

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