Industrial Production | Partial recovery builds optimism

Industrial Production | Partial recovery builds optimism
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First Published: Fri, Jul 10 2009. 11 29 PM IST

However, IIP growth for April was revised downwards to 1.2%, from the initial estimates of 1.4%. Ahmed Raza Khan / Mint
However, IIP growth for April was revised downwards to 1.2%, from the initial estimates of 1.4%. Ahmed Raza Khan / Mint
Updated: Fri, Jul 10 2009. 11 29 PM IST
New Delhi: Factory output in India grew at the fastest rate in eight months in May on the back of a strong recovery in the manufacturing sector, indicating that the country’s economy has most certainly bottomed out and may well be on the road to recovery as predicted by the finance ministry.
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However, this will depend on the assumption, as laid down in the Economic Survey for 2008-09, that the US economy bottoms out by the beginning of the September quarter and the monsoon are not too off the mark.
Data released by the Central Statistical Organisation showed the Index of Industrial Production (IIP) grew 2.7% in May compared with a year ago while the manufacturing sector expanded at 2.5%, the highest in six months. However, IIP growth for April was revised downwards to 1.2%, from the initial estimates of 1.4%.
While the positive news remains the sustained expansion in both intermediate and basic goods, the worrying sign is the continued contraction in capital goods for the third month in a row in May. While the pick-up in consumer goods was largely on account of consumer durables, consumer non-durables continued to post a contraction because of poor production trends in food products and beverages.
The performance of consumer durables confirms that consumption demand (that involving consumers simply going out and buying products) is holding up, though the contraction in capital goods suggests that investment demand (or that brought about by significant investments in factories) is diminishing and will have an obvious bearing on the medium-term growth prospects of the economy. The finance ministry has projected an economic growth of 7% for the current fiscal year, with an upper bound of 7.75% and a lower bound of 6.25%.
However, IIP growth for April was revised downwards to 1.2%, from the initial estimates of 1.4%. Ahmed Raza Khan / Mint
Economies across Asia are starting to show signs of recovery from the worst global recession since the Great Depression. China’s industrial production rose 8.9% in May from a year earlier, after advancing 7.3% in April. Japan’s output increased 5.9% in May from a month earlier, the third monthly gain.
However, deputy chairman of the Planning Commission Montek Singh Ahluwalia remains cautious. “We do believe that the worst is over, but there is a difference between the worst being over and getting back to robust growth,” he told reporters.
Sherman Chan, economist with Moody’s Economy.com, was equally cautious about the possibility of a strong recovery in an advisory note. “Although industrial production appears to have bottomed out as an upward trend has appeared, a solid recovery may still be a few months away.”
Chan added that much like in Japan, producers in India may have run down inventories during the early stage of the global turmoil, implying that the decline in production may have actually been steeper than the fall in orders, and that the recent rise in production could be a result of businesses rebuilding inventories amid signs of green shoots in the global environment.
The International Monetary Fund (IMF) on Wednesday raised its forecast for India’s economic expansion in 2009 by almost one percentage point to 5.4%. IMF said prospects for a pick-up in growth have also improved in India owing to the economic stimulus. However, it cautioned that sustained acceleration of growth in emerging economies such as India depends on a recovery in advanced nations.
Citigroup India, in a report released on Friday, said it expects to see some pick-up in industrial growth, averaging around 5% in the current fiscal year as compared with 2.6% in 2008-09. “This is due to an improvement in the investment climate, coupled with growth being the government’s top priority,” it said.
Rolling on: A gas turbine rotor at Bharat Heavy Electricals Ltd in Hyderabad. The finance ministry has projected a growth of 7% for FY10.
However, weak external demand may work as a deterrent to a strong recovery in the manufacturing sector. Commerce and industry minister Anand Sharma had told Parliament on Wednesday that exports contracted 29% for the ninth month in a row in June. And Chan said with exports still in a free fall, external support for Indian producers is certainly lacking. “A rise in domestic activity has likely helped to offset external weakness and arrested the downward trend in industrial production.”
Similarly, a weak monsoon could delay the economic recovery. “With the rains failing to pick up momentum (rainfall deficiency is currently at 36% during 1 June–8 July) and water level in the reservoirs remaining low, the possibility of the monsoon offsetting the growth stimulus in the recent Budget has increased,” said Citigroup India in a report released on Friday. It further said the rising El Nino threat could impact the rains towards August-September, which could pose further downside risk to the headline growth number of 6.8%.
However, several lead indicators such as the Purchasing Manager’s Index (PMI) and cement despatches have been indicating a sustained recovery. “The positive fiscal stimulus in the Union Budget along with our expectations of an upturn in the investment cycle in the second half of this year is likely to keep domestic demand robust, despite the prospects of a poor monsoon and a weak external environment,” Goldman Sachs said in a report on Friday. “We maintain our GDP (gross domestic product) growth forecast of 5.8% for FY10 and see the risks as balanced.”
The Markit PMI for manufacturing in India was at 55.3 in June, slightly lower than May’s reading of 55.7. A reading above 50 signifies expansion. According to the Society of Indian Automobile Manufacturers, car sales grew for the fifth month in a row in June while overall automobile sales rose 14% at 917,000 units against 802,000 units during the same month a year ago.
Bloomberg contributed to this story.
asit.m@livemint.com
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First Published: Fri, Jul 10 2009. 11 29 PM IST