Mumbai: India’s factory output grew at its fastest pace in 22 months in August, signalling the country’s recovery from the slowdown and giving its central bank scope to raise interest rates, but economists say the Reserve Bank of India (RBI) could maintain status quo in its October policy as the sustainability of the recovery remains doubtful—for now.
Output at factories, utilities and mines rose 10.4% in August from a year earlier, higher than what economists expected, and July’s annual growth was revised up to 7.2% from 6.8%.
Graphics: Ahmed Raza Khan / Mint
The annual growth pace is the fastest since October 2007, fuelling a 2.3% rise in the country’s benchmark stock index, the Sensex, but the base effect, or the growth rate in the year-ago period, is partly responsible for this. Last year, the growth rate in the corresponding period was a meagre 1.7%. The Sensex rose 384.01 points to close at 17,026.67, the most in at least six weeks after the release of the industrial output data. The broad-based 50-stock Nifty rose 2.2% to 5,054.25.
A lower interest rate regime has helped companies access funds at a cheaper rate and various sops and incentives extended by the government to the industrial sector have helped them expand their operations.
As part of its accommodative monetary policy regime, the central bank brought down its policy rate from 9% to 3.25% between October 2008 and April 2009 and pared the portion of deposits that banks are required to keep with it from 9% to 5%. The government reduced taxes on consumer products and imports too and together the banking regulator and the government offered a stimulus worth at least 12% of India’s Rs56 trillion gross domestic product to lift a sagging economy.
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According to D.K. Joshi, principal economist of rating agency Crisil Ltd, the industrial growth number cannot be interpreted as a sure sign of recovery as yet. “We have to evaluate some factors: What is the overall demand in the economy and what is the private demand? The healthy numbers we are seeing are mainly because of the government initiatives but an economic recovery cannot happen unless private demand is robust.”
Sougata Bhattacharya, chief economist of Axis Bank Ltd, said a lot of growth momentum has been driven by pre-festive season sales of consumer durables. Sales of products such as television sets, washing machines and refrigerators surged by an annualized 22.3% as stimulus measures helped fuel demand. “We are getting stronger signs of recovery but will it sustain in the next four-five months? A call on whether recovery is secured can be concluded if the post-October numbers remain steady,” Bhattacharya said.
Other economists echoed that sentiment of caution.