New Delhi: Indian factory output rose strongly at a double-digit rate for the sixth straight month in March, though this was below consensus analyst forecasts. Economists cautioned that industrial growth would continue to lose steam as fiscal incentives are withdrawn and the base effect wears off after May.
“The incipient slowdown is clearly visible,” Deutsche Bank economists Taimur Baig and Kaushik Das said in a research note.
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Industrial growth measured by the Index of Industrial Production (IIP) in March was 13.5% higher than a year ago; the Manufacturing Index grew by a mere 0.3% in March 2009, when production schedules were hit as a result of the global crisis. IIP grew at 16.68% and 15.1% in January and February, respectively.
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Planning Commission deputy chairman Montek Singh Ahluwalia indicated that the pace of industrial growth may decelerate further, but will remain in the double digits.
The expectation that industrial growth will continue to moderate may encourage the Reserve Bank of India (RBI) to hold its fire for some time. The central bank has already increased interest rates twice this year on concerns that high inflation is spreading beyond food items. Inflation data for April will be released on Friday.
Industrial growth for the whole of the fiscal year that ended in March has come out more than what the Central Statistical Organisation (CSO) had forecast in its advance estimates of economic output: 10.4% compared with the estimated 8.6%.
However, economists do not think this will lead to higher growth in gross domestic product (GDP)—a measure of economic output.
Pronab Sen, chief statistician of India, explained that there is no one-to-one correlation between industrial growth and economic growth since the former measures the volume of production while the latter is a measure of value addition. He added that it is conceivable that economic growth could be lower than expected despite strong industrial growth “if the intermediate goods component in IIP grows at a comparatively higher rate” since “value addition will be less”.
Sen believes that even if the GDP estimate for the last fiscal year were to go up, it would not be a substantial increase.
Samiran Chakraborty, head of India research at Standard Chartered Bank, said when the revised GDP estimate is released, the growth in services sector may be lower than estimated. “This is because growth in the community, social and personal services component in GDP, which is driven mainly by government spending, will be lower for the fourth quarter of 2009-10 due to a base effect last year. This will pull down services sector growth, thus balancing out the gain in industrial growth.”
Chakraborty expects IIP to register 8.5% growth in 2010-11.
Sen said IIP growth rate will start declining as the base effect wears out by May.
Agrees Chakraborty. “IIP will see a gradual deceleration from here onwards. We need to monitor the pace of this deceleration,” he said.
“The boost from fiscal stimulus and inventory adjustment has begun to wane in recent months, weighing on manufacturing production,” Nikhilesh Bhattacharyya, associate economist at Moody’s Analytics said in an advisory.
In such a scenario, economists expect the central bank to be cautious in tightening policy rates to curb inflation. “RBI knows that the current high IIP growth rate comes on a low base last year. That is why they are cautious in tightening policy rates and I see no reason why they will change that position,” Sen said.
Chakraborty said he expects RBI to hike policy rates by 25 basis points on a periodic basis. “It will not tighten rapidly. There is still some uncertainty in global and domestic economic scenario. The central bank has also the additional problem of managing government’s borrowing programme. Hence, it will be relatively cautious.”
Agrees Bhattacharyya. “The slowdown in industrial production growth will reduce pressure on RBI to hike rates. With the external situation highly uncertain and India’s financial system highly vulnerable to sudden capital outflows, now is not the time to aggressively withdraw liquidity and hike borrowing costs,” he said.
The lower-than-expected growth in IIP in March was mainly due to deceleration of growth in capital goods, which grew 27.4% compared with 39.7% in the previous month. Sen said this is due to the volatile nature of the growth in capital goods.
However, growth in electricity production accelerated in March to 7.7% from 6.7% a month ago. “Electricity production tracks GDP and the uptick in electrical output is a sign that growth is spreading to the broader economy, having been concentrated in manufacturing, mining and stimulus affected areas for the latter part of 2009,” Bhattacharyya said.
Even as consumer goods registered robust growth of 10.6% in March, consumer non-durables continued its weak performance, growing at 3.3% in the same month. “It is a little worrying. However, this is still the pre-harvest data. We have to wait for the post-harvest numbers,” Sen said.
He said that starting next month, CSO is aiming to release the new IIP series with base year 2004-05. The new series will have an expanded and updated list of commodities. On 11 June, CSO will release the industrial production data for April. “The backlog data for the previous years (with the new base year) will be released at a later date,” Sen added.
Graphic by Paras Jain/Mint