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Economy Sep 12, 2012

IIP: Languishing consumption growth is an alarm bell

By Rajesh Pandathil

Indian IIP data is a non-event now. It neither give rise to hopes nor dash them, because the problems are much deeper. An interest rate cut is not going to help much. The crisis of confidence is percolating from the corporates to the common man.

The flattish output growth in July has been largely brought about by the decline in manufacturing, mining and capital goods sectors.

But slowdown in consumption is also clear. In June, the growth rate in consumer non-durables, including soap, toothpaste, toiletries and food items, fell to a negative 1 percent. In July, the growth is languishing at a meagre 0.1 percent growth.

"The Indian consumer is consuming less, in the belief that he must conserve resources for harder times," a Firstpost article had said in an analysis of the June IIP.

The July data is heightening this concern.

"We need to watch out for how the consumption numbers, how the consumer durables and non durables perform going forwards because we know investment activity has slowed down very sharply," Gaurav Kapur of Royal Bank of Scotland told CNBC-TV18.

Consumption has been holding off but from the first quarter GDP data it is clear even consumption is slowing down, he said.

Consumption has been holding off but from the first quarter GDP data it is clear even consumption is slowing down

"A lot of the uptake in consumer non-durables is largely on account of a positive base effect or supportive base effect," he said.

Going by the situation on the ground, there has not been any change even after the reforms-friendly P Chidamabaram returned to the finance ministry.

He has belied expectations, and is yet to take any concrete action on the reforms front.
Economists have projected a fiscal deficit of more than 6 percent for the financial year, as the government's dithering on the fuel prices is adding to the subsidy burden.

"The (IIP) data coming in positive or negative is not very important in the overall growth scenario as there has been a drastic slowdown in the economy," Sandip Agarwal of Antique Stock Broking said on CNBC-TV18.

Companies are not taking any initiatives and are waiting for the government or the RBI to take action first, he said.

He doesn't see any improvement in the near term.

So hold your breath as the situation unfolds over the next few months.

by Rajesh Pandathil

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