IIP growth raises hopes of recovery; mining and manufacturing grow in double digits

BS Reporter / New Delhi, October 13, 2009

Industrial output grew the most in 22 months to 10.4 per cent in August, indicating a steady turnaround in the economy but also raising worries that the government and the central bank would roll back fiscal and monetary stimulus measures.

Output at factories, utilities and mines, which account for about 17 per cent of GDP, exceeded economists’ expectations of a 9.7 per cent increase and was significantly higher than 1.7 per cent in the same month last year, causing some analysts to attribute this year’s performance to the low base effect.

Most, however, also supported the official claim that the impressive IIP figures were due to the trickle-down effect of the government stimulus packages, though the strength of the private sector demand remained uncertain.

The central bank cut interest rates six times between October and April and the government reduced taxes on consumer products and imports, together providing a stimulus worth more than 12 per cent of India’s GDP. %)

“The good IIP numbers are a result of stimulus packages. These numbers were anticipated,” said Ajay Shankar, secretary, department of industry policy and promotion.

Finance Minister Pranab Mukherjee termed it as a good sign of recovery. “We are hoping that when the final figure of second quarter will be available, there will be some higher growth so that we can make up even higher growth in the third and fourth quarters.” The economy grew 6.1 per cent in the first quarter of this year, exceeding most analysts’ expectation.

Expressing the possibility of sustained growth in industrial production from now on, Finance Secretary Ashok Chawla said, “We expect the trend to continue and expect better numbers in September.”

Reacting to the news, the Bombay Stock Exchange’s 30-share index rose 384 points or 2.31 per cent to close above the 17,000 mark.

Other signs:

The August IIP numbers appear to confirm signals of an upturn emerging from other indices, such as the HSBC India Manufacturing Purchasing Managers Index, based on data compiled from monthly replies to questionnaires sent to purchasing executives. An index above 50 implies expansion and the index has indicated this for the last few months, though the rate of improvement in August and September has slowed over that of July.

“The purchasing manager’s index indicates new orders and rise in production. An inventory adjustment effect will also boost production, with many firms having run down stocks earlier this year in anticipation of a prolonged downturn that looks increasingly unlikely for many sectors,” said Nikhilesh Bhattacharyya, associate economist with Moody’s Economy.com.

The steady upturn in IIP was also preceded by rising business confidence According to the CII M-Ascon survey of the manufacturing industry for the April-June period — the latest data available — 10.4 per cent of the 77 sectors reporting production were in the excellent growth category (more than 20 per cent), compared to 7 per cent in the same period last year.

Mining leads the charge:

Leading the August numbers was mining, which rose 12.9 per cent compared to just 2.8 per cent in August 2008. Manufacturing, which accounts for about 80 per cent of industrial output, continued the strong growth trend of July, growing 10.2 per cent in August against 1.7 per cent in the same month last year. Electricity output also grew by 10.6 per cent against 0.8 per cent in the corresponding month in 2008.

In aggregate terms, industrial growth stood at 5.8 per cent against 4.3 per cent in April-August year ago, though this is still behind the 2007 figure (see table).

According to Bhattacharyya, “The strength of private sector demand remains somewhat uncertain, with weak expansion in production of consumer non-durables, which is the area likely to have received the least assistance from government spending and price control measures.”

DK Joshi, principal economist with Crisil India, attributed doubt over sustaining growth to the lack of strong credit offtake. “However, I expect private consumption to bounce back by 2010-11 fuelled by rising incomes and an improved global situation. Interest rates are unlikely to shoot up and will continue to support growth for the coming months,” he added.

Industry optimistic:

Industry is also optimistic about the coming months and expects the central bank to continue to keep interest rates low. At its last meeting on July 28, the Reserve Bank held its reverse repurchase rate at 3.25 per cent and maintained the repurchase rate at 4.75 per cent. The cash reserve ratio, was kept unchanged at 5.0 per cent.

“It is important to nurture this economic recovery by continuing with the current fiscal and monetary space which has been given to industry to recover, especially during a year of poor monsoons that could impact agricultural growth. CII hopes that the RBI would give the welcome signal of an accommodative monetary policy when the half yearly review is done,” said Chandrajit Banerjee, director general,CII.

Ficci president Harsh Pati Sighania also maintained that it was critical that the overall policy parameters and stimulus measures were not reversed at this point of time.

Of 17 industry groups in the index, 14 showed positive growth. Use-based categories like basic goods grew by 10 per cent against 3.9 per cent in the same period last year. Capital and consumer goods also grew an impressive 8.3 and 8.5 per cent respectively against 0.9 and 6.4 per cent in August 2008. Intermediate goods which had registered a decline of 5.5 per cent in August last year grew by 14.3 per cent this year.

Consumer durables also posted a 22.3 per cent growth rate against 3.9 per cent on a year on year basis. Only consumer non-durables registered a marginal decline in growth rate to 3.7 per cent during the month against 7.3 per cent last year. The growth in consumer non-durables is also lower than the 5.7 per cent growth in July.