Economic recovery turned a mirage as lacklustre manufacturing performance pulled down industrial growth for the second month in a row to 0.6 per cent in December 2012. The December Index of Industrial Production (IIP) number was in sharp contrast to the growth of 2.7 per cent recorded in the same month in 2011.

The Central Statistics Office (CSO) today also revised downwards the IIP number for November 2012. It now pegs the contraction at 0.84 per cent in November against the earlier projected 0.1 per cent.

Factory output has contracted in six of the last nine months, reflecting all-round weakness in the industrial sector.

The weak IIP footprint may prompt Finance Minister P. Chidambaram to refrain from going for any across-the-board increase in indirect taxes in the upcoming Budget.

Economy watchers widely expected the Minister to tweak indirect tax rates to bolster revenues.

Indirect tax revenues are growing at levels below the budgeted rates, raising concern that the Centre will find it difficult to achieve the budget estimates.

The IIP dipped in December on the back of 0,7 per cent contraction in manufacturing, which has a weightage of over 75 per cent. In December 2011, manufacturing had recorded 2.8 per cent growth.

The mining sector output declined 4 per cent for the month under review, higher than the 3.3 per cent contraction seen in same month in previous year.

The current weakness in the industrial sector coupled with higher than expected retail inflation for January may prompt the Reserve Bank of India (RBI) to refrain from further interest rate cuts in the March policy review, according to analysts.

All eyes are now on the wholesale price index (WPI) based inflation for January, slated to be announced on Wednesday.

The RBI recently cut policy rates by 25 basis points and this was seen as an attempt by the central bank to push growth.

(This article was published on February 12, 2013)
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