New Delhi: India’s factory output fell for the third time in five months in February as the global slowdown hit hard, but analysts said they could see some signs of revival after a dismal March quarter.
There was still room for the Reserve Bank to cut rates to give any upturn a boost, perhaps at an 21 April policy review, analysts said, with inflation not a concern given it was likely to turn negative soon and stay near zero for months.
Industrial production fell 1.2% in February from a year earlier, but January’s initially reported fall was revised to a rise of 0.4%.
“We expect the industrial output to turn positive some time in April. So we think the February data confirms our view that the economy is bottoming out but we think March data will also be negative,” said Atsi Seth, chief economist at Reliance Equities.
“Industrial activity will start accelerating although not at a very fast pace. Data from auto, cement and also the fact that the government has been spending gives us the sense that there will be a recovery.”
India’s factory output is primarily geared to meet domestic demand, unlike many Asian economies which depend heavily on exports. But a slowdown in the economy, a squeeze on funding and recessions in western economies have hurt confidence at home and sharply cut oversees sales of Indian goods. ”Sectors showing poor performance are those having export linkages like textiles and leather,” economic affairs secretary Ashok Chawla said.
“The internal demand continues to be robust,” he said.
Industrial output growth has slowed sharply from annual rates above 10% in 2006 and the first half of 2007. In October 2008, factory output contracted for the first time in 13 years.
Prime Minister Manmohan Singh has said the economy could have grown less than 7% in the year ended 31 March, after growing at or above 9% in the previous three fiscal years.
Stimulus and demand
Economists said stimulus packages announced by the government since late last year, along with aggressive policy easings by the central bank, look to be having an impact given improved car sales and uptrend in cement and steel demand.
They also said robust performance of the consumer goods and capital goods, a key barometer of activity, in the February output report showed demand was visible in the economy.
Car sales rose in annual terms for the second successive month in March, and an industry body said sales were expected to rise by up to 5% in 2009-10.
Separate data showed annual wholesale price inflation eased to 0.26% at end March, just pipping a mid-March reading of 0.27% to be the lowest rate since records began more than 30 years ago.
”Inflation index has not changed week-on-week, however, firmness in manufacturing prices is a good sign and vindicates the claim that economic recovery is around the corner,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
Reserve Bank of India governor Duvvuri Subbarao has said India’s economic slowdown had been steeper than estimated, but cautioned that further fiscal stimulus would carry a cost.
He also expressed concern about consumer price inflation, which was running at an annual 9.6% in February.
Since October, the central bank has cut its key lending rate by 400 basis points, while the government has slashed factory gate duties and service tax to protect growth and jobs.
But increased spending has led to heavy market borrowing, pushing up bond yields and undermining the impact of the central bank’s rate cuts. Some analysts have also been concerned about the heavy government borrowing crowding out private firms and feeding inflation in the months ahead.
There had been speculation of the government directly selling debt to the central bank to ease the pressure on the market but Subbarao has said such a move is not a benign solution.