JEDDAH – India's industrial output shocked analysts last Tuesday after it logged in its second consecutive contraction in December, Asiya Investments, an investment firm specializing in emerging Asia investments, said in a recent analysis. The fall was largely due to a sup-optimal performance being put on by both the manufacturing sector (which accounts for three quarters of total production) and the mining & quarrying sector. Industrial production (IP) came in at -0.6 percent, following a contraction of -0.8 percent in November. Most analysts were expecting IP to climb back on to positive turf. Gains in the manufacturing sector continue to taper off due to dwindling domestic consumption, investment and export levels, leading to a fall in consumer and capital goods, said Dana Al-Fakir, economist at Asiya Investments, who prepared the report. This in turn is having an impact on the mining sector as the level in manufacturing activity falls, there is less demand for commodities. Several factors are affecting manufacturing negatively. Domestic consumption continues to get hit as purchasing power is persistently eroded by high levels of inflation. The widening fiscal deficit has had negative repercussions on the country's investment-grade credit rating, discouraging foreign investment. Exports are tepid due to the debt-ridden euro zone, India's trading partner. Performance is not expected to improve on the export front as the euro zone is likely to log in another contraction this year. IP is a measure of economic activity, surveying factory production, related manufacturing processes and mining. IP reflects the consumer sentiment and interest rate conditions because levels of production are highly sensitive to those factors. Because of these qualities, forecasters use IP to understand future economic activity. IP is a coincident indicator, which means that it reflects the current state of the economy. If production activity speeds up rapidly, this could mean the economy is recovering or growing, but also can be a warning sign of upcoming rising inflationary pressures. On the other hand, if prices accelerate and the central bank undergoes monetary tightening by raising interest rates in order to curb inflationary pressures, IP, as well as economic activity, is bound to decelerate due to more expensive credit. India's IP has been on a downward trend since the end of 2010 and if it continues its sub-par performance, core inflation should continue to fall as well. – SG
