Industrial output in April grew 17.6% over the corresponding period last year, beating estimates by over three percentage points on the back of strong growth in capital goods. Slow growth in some industrial sectors and Europe’s economic woes may, however, keep the central bank on its current path of gradually nudging up interest rates, economists said.
Graphic: Yogesh Kumar / Mint
“All this bodes well for the economy in the coming months,” Citigroup Research’s Rohini Malkani and Anushka Shah concluded in their report on April’s Index of Industrial Production (IIP).
Growth was driven primarily by a 72.8% surge in capital goods, besides a robust showing by consumer goods at 37%. Capital goods growth was fuelled by demand in the transportation sector and for machinery. The momentum in manufacturing, which grew 19.4%, was a key highlight of the IIP numbers.
Year-on-year IIP growth beat median estimates of 13.5% and 14.3% based on economist polls by Reuters and Bloomberg, respectively. Seasonally adjusted data for April also showed sharp sequential growth.
According to Malkani and Shah, IIP for April on a seasonally adjusted basis (removing predictable fluctuations from data) was up 3.4% against a contraction of 0.7% last month.
Economists interpreted April’s IIP numbers as an indication that the economy had gained momentum. Still, most are being conservative about the current fiscal’s forecasts.
Citigroup Research held to its GDP growth forecast of 8.4% for the current fiscal as did Barclays Capital, which had forecast 8%.
According to Samiran Chakraborty, regional head of research (India) at Standard Chartered Bank Plc, in a normal cycle, April’s IIP performance would have indicated full-fledged economic growth. On this occasion, however, weaknesses in the external sector have led to a relatively subdued reaction to the data, he said.
The fear of a double-dip recession in Europe and its attendant impact on exports are expected to temper Reserve Bank of India’s (RBI) stance on interest rates even though inflation as measured by the Wholesale Price Index hovers around 10%, compared with its fiscal year-end estimate of 5.5%.
Most economists, however, expect RBI to gradually continue with its current policy trend of nudging up interest rates. Citigroup Research, in its report, forecast a 25 basis points (one basis point is one-hundredth of a percentage point) increase in RBI’s policy rate in its July monetary policy statement.
“In the backdrop of the sustained high industrial growth, still high inflation, but sharply decelerating monetary aggregates and already tightening monetary conditions, the policy of calibrated gradual tightening appears well thought out,” Mridul Saggar, chief economist at Kotak Institutional Equities, said. “RBI would probably stay with it.”
Another factor that might influence the central bank to follow its current course is the likelihood of the headline growth in industrial activity moderating from June on account of a statistical base effect.
Industry body Federation of Indian Chambers of Commerce and Industry (Ficci) cautioned the headline numbers might moderate soon. According to a media statement on IIP released by Ficci, “This trend of very high growth might moderate from June onwards because of the base effect. After a slow growth during 2008-09, the IIP figures picked up since June 2009.”