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Factory output surge may turn heat on rates

Factory output surge may turn heat on rates
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First Published: Fri, Mar 12 2010. 11 36 PM IST

 Graphic: Ahmed Raza Khan / Mint
Graphic: Ahmed Raza Khan / Mint
Updated: Fri, Mar 12 2010. 11 36 PM IST
New Delhi: A surge in capital goods and consumer durables boosted by last year’s low base catapulted India’s factory output to the second highest growth rate since 1994.
Graphic: Ahmed Raza Khan / Mint
A sustained recovery in manufacturing and ballooning inflation is expected to force the central bank to hike policy rates in its monetary policy review on 20 April.
The Index of Industrial Production rose 16.7% in the first month of 2010, compared with the meagre 1% growth a year earlier.
The Central Statistical Organisation (CSO), which released the data on Friday, also revised the December industrial growth rate upwards to 17.6%, compared with 16.8% estimated earlier.
This is for the fourth consecutive month that industrial output has grown at a double-digit rate.
Finance minister Pranab Mukherjee said the signals were clear and encouraging.
“I do hope it will be possible for us to achieve the growth (rate) which has been projected by the advance estimate of CSO,” he said. “For the two consecutive months, there has been high growth. Perhaps it indicates that the manufacturing sector is going to make its substantial contribution to growth and it (growth) is on the path of fast recovery.”
CSO has estimated the economy will grow at 7.2% in the current fiscal ending 31 March, faster than last year’s 6.7%.
Replying to the discussion on the Union Budget in the Lok Sabha, Mukherjee said this indicates that growth is not just being driven by government expenditure, but by manufacturing and industrial production as well.
Planning Commission deputy chairman Montek Singh Ahluwalia told reporters that the economy has weathered an extraordinary crisis.
“Now we are well set to get back to 8.5% (GDP growth) in 2010-11 and hope to see 9% growth after that,” Ahluwalia said.
Nikhilesh Bhattacharyya, associate economist at Moody’s Economy.com, said in an advisory that strong domestic demand, inventory adjustment, a low base effect and rising external demand have led to rapid growth in Indian manufacturing in recent months.
In January, while capital goods growth shot up 56.2%, led by machinery and transport equipment, consumer durables expanded at 31.6%.
Bhattacharyya said the surge in capital goods points towards a rebound in investment spending due to rising business sentiment and high loan demand.
Rohini Malkani, economist with Citigroup India, said in a report released on Friday that the economy is now showing clear signs of a demand revival with double-digit growth seen across most sectors.
As many as 14 out of 17 industry groups have shown positive growth in January compared with the year ago.
Pronab Sen, chief statistician of India, said the optimism should be tempered by caution over factors that could impact growth.
“One does not want to take away the investment growth story, but one should not get carried away by the high growth in capital goods as it is bound to be volatile by its nature,” he said.
Sen added that high growth in consumer durables could be because consumers anticipated a hike in excise duty in the February Budget and advanced purchases.
Consumer non-durables continued their laggard performance, contracting 3.1% in January because of a slump in the output of sectors such as food products and beverages, tobacco-related products, jute, vegetable fibre, and textiles.
“We are still not certain about the effect of drought on rural India. The consumer non-durables data seem to back up the conjecture that the drought has impacted rural income,” Sen said.
Analysts expect the central bank to hike policy rates next month, given that the government rolled back some stimulus measures in the Union Budget and with inflation remaining stubbornly high.
Sen said he’s unsure of the timing of the central bank’s policy intervention as inflation remains a supply side phenomenon.
Headline inflation as measured by the Wholesale Price Index (WPI) surged to a 15-month high at 8.56% in January, more than the Reserve Bank of India’s year-end target and is expected to cross the double-digit mark within a few months.
Food inflation for the week ended 27 February stood at 17.81%.
Ahluwalia said he expects food price inflation to come down in the next couple of months on the back of an expected good rabi crop.
He also downplayed fears of inflation touching double digits. “I don’t think this will happen. I expect WPI inflation to gradually come down...you will see that,” Ahluwalia said.
However, the interest rate cycle has already started changing. Private sector lenders such as ICICI Bank Ltd and Kotak Mahindra Bank Ltd as well as the largest mortgage lender, Housing Development Finance Corp. Ltd, withdrew special home loan schemes on 4 March.
PTI contributed to this story.
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First Published: Fri, Mar 12 2010. 11 36 PM IST