Strong industry data adds to stimulus debate

Strong industry data adds to stimulus debate
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First Published: Thu, Nov 12 2009. 01 22 PM IST
Updated: Thu, Nov 12 2009. 01 22 PM IST
New Delhi: India’s industrial output grew a faster-than-expected 9.1% in September from a year earlier, helped by stimulus measures and adding to the debate over when the government should pull back from its aggressive policies to drive growth.
The increase in industrial output topped expectations in a Reuters poll, and August’s annual growth was revised up to 11% from 10.4%, data showed on Thursday.
“It’s extremely strong. Month-on-month it has grown about 17% annualised after seasonal adjustments. If this pick-up is not because of consumption then it won’t sustain,” said Ramya Suryanarayanan, economist at DBS in Singapore.
“The rise is mainly on account of pent-up demand,” she said, expecting the rate of industrial output growth would moderate in October and November.
Yields on the 10-year bond rose 2 basis points following the data release.
Consumer durable goods output surged by an annual 22.2% as stimulus measures, festivals and wage back-pay to government staff boosted demand.
Manufacturing production in Asia’s third-largest economy rose 9.3% in September from a year earlier, while mining output was up 8.6% and power generation rose 7.9%.
“It is much above expectations, even if you adjust for the positives ahead of Diwali in October. It is reiterating the fact that the policy environment continues to support industrial growth,” Jyotinder Kaur, economist at HDFC Bank in New Delhi.
“I think the RBI will hike the repo and reverse repo rates at the January policy, but banks are not likely to immediately follow by raising lending rates. That will maintain sweet spot for industrial growth,” Kaur said.
India’s industrial output growth, which expanded for the ninth consecutive month, still lagged neighbouring China’s 13.9% growth in September.
On Wednesday, China reported October factory output growth surged to a 19-month high of 16.1%, a sign the world’s third-largest economy had put the worst of the global downturn behind it.
The October purchasing managers’ index for India showed the pace of manufacturing activity picked up as domestic demand and factory orders rose.
Bad Monsoon
Faster output at factories, mines and utilities has helped offset a decline in farm output after the weakest monsoon in nearly four decades and then floods in parts of the country hurt crops and pushed up food prices.
Price pressures in recent months have strengthened the view the Reserve Bank of India (RBI) could start tightening from early next year.
Economists think the first policy shift could be an increase in the cash reserve ratio for banks in the December quarter.
On Sunday, Prime Minister Manmohan Singh said the economy could still grow by 6.5% in 2009-10 (April-March), compared with 6.7% last year and 9% or more in each of the previous three years.
Officials have said the country still had to wait before unwinding stimulus efforts as the economy was not operating at full capacity, and said the inflationary impact of India’s stimulus measures was likely to be minimal.
Last month, RBI kept its key lending rate unchanged after cutting it by 425 basis points between October and April as the global downturn hit the economy harder than expected. It also slashed banks’ reserve requirements and pumped liquidity into markets.
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First Published: Thu, Nov 12 2009. 01 22 PM IST