The Index of Industrial Production (IIP) grew at an astonishing 16.7% year-on-year (y-o-y) in January against a mere approximately 1% y-o-y growth a year back. After a difficult start to FY10, industrial growth picked up after June and posted a markedly strong growth of around 9.6% y-o-y in the April-January period. Sequentially, the index jumped around 0.2% from the December levels.
On month-on-month seasonally adjusted basis, IIP grew around 1% in January on top of around 4.6% in the previous month. Growth in the recent months had been broad-based—supported by huge jump in the capital goods index (for the second consecutive month) followed by growth in the intermediate and basic goods indices. Lead indicators, including Purchasing Managers’ Index, intermediate goods production and commercial vehicles production have continued to show strength. Given the likelihood of continued sequential growth and markedly favourable base, we expect IIP to stay in the range of similar high growth rates at least for the next three-four months.
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The government announced the Union Budget for FY11 amid market speculation of a dilemma between need for focus on growth, fiscal consolidation and stimulus rollback. Finally, rollback of stimulus turned out to be selective and gradual excise and customs duties were increased partially, while service tax rate was kept unchanged. Overall, government did not resort to any severe fiscal policy contractions, keeping a steady eye on supporting broad-based growth recovery.
On the monetary policy front too, we expect the Reserve Bank of India (RBI) to pursue a policy-to-policy approach. Given the backdrop of inflation on the verge of hitting double digits and current policy rates being far lower than their “steady state” levels, hike in policy rates are likely from the first quarter of FY11 onwards. However, such hikes will definitely be gradual—RBI will refrain from taking any hasty move based on point–to-point data releases.
As per use-based classification, capital goods production for the month stood at around 56.2% y-o-y on top of around 39% growth in December. During the recent months, growth in capital goods was led by higher production of commercial vehicles, wagons, shop building and repair, and tractors. For April-January FY10, growth in capital goods stood at 16% y-o-y against around 9% for the similar period in FY09.
Growth in consumer goods production stood lower at around 4% y-o-y against around 12% y-o-y in December; consumer non-durables production fell by around 3% y-o-y (against around 3% rise in the previous month) and dragged the index down. This was despite consumer durables growing at around 31.6% y-o-y against around 46% in the previous month. Apart from low base, higher demand for durables in anticipation of excise and customs duty hike in the budget announcement, drove the index further.
During January, intermediate goods’ production was up around 21.3% y-o-y, on top of a around 21% increase in the previous month. This segment, typically, tends to exhibit a 2-4 month lead period over the overall IIP.
Graphic by Yogesh Kumar/Mint