India’s industrial output has averaged a robust 10.5% growth over the last four months, admittedly helped partly by the base effect and the policy stimulus. However, we believe these strong numbers are sustainable beyond an exit from stimulus owing to several factors.
Also See Gaining Steadily (Graphics)
Firstly, India’s industrial recovery has been broad based. Secondly, private consumption is reviving, from 1.5% growth in the first quarter of FY10 to 5.6% in the second quarter. Lastly, growth in key sectors such as capital goods and manufacturing has rebounded and should stay firmly on course.
India’s year-on-year (y-o-y) industrial production numbers have been robust—in high single digits consecutively since June, and especially strong in the last four months, averaging at 10.5%. Some of these numbers were undoubtedly aided by the base effect and, of course, the policy stimulus. The base effect will remain favourable only till May. And stimulus withdrawal has weighed down on industrial gross domestic product in the past.
However, there are good reasons to believe that these strong numbers are sustainable beyond May as well, even though most of the multiplier effects of fiscal and monetary stimulus would have subsided by then, and policymakers would be working towards fiscal consolidation and anchoring inflationary expectations.
As many as 14 out of the 17 industry groups have shown positive growth during the month of November compared with the corresponding month of the previous year.
Private consumption has picked up well, especially in the last four months. Consumer spending has been healthy in both durables as well as non-durables. Consumer durables have registered the strongest growth, but the base effect is the more important factor here. Private consumer spending has revived from low growth of 1.5% in the first quarter to 5.6% in the second quarter, and should average between 6.5% and 7% in the second half of the fiscal. It is likely to remain strong next fiscal at above 7% against the 6.6% average recorded over the past six years.
Intermediate and capital goods, too, have been doing well, clocking sturdy growth rates of 19.4% and 12.2% y-o-y, respectively, in November, while their average run rate in the last six months has been 13% and 10%, respectively. This bodes well for the economy, instilling confidence in the solid foundation of industrial revival.
Manufacturing, which accounts for more than 80% of the Index of Industrial Production (IIP), had a 12.7% y-o-y sprint in November, averaging 10% in the last six months. Auto sector volumes have jumped by more than 68% y-o-y in December, the strongest in many years for the month. With strong backward and forward linkages for this sector, a double-digit print for the December IIP is likely. It’s only electricity which has lost some steam.
Some sectors that responded well to the policy stimulus have rebounded with enough momentum to cross the “escape velocity”. They have certainly “taken off” in the sense that they can sustain most of this growth beyond stimulus withdrawal. The government will have to be careful and selective in calibrating the stimulus exit. While it may be prudent to retain some stimuli, especially in sectors with strong linkages, there is certainly a case for withdrawing benefits from those that have not responded well.
Graphics by Yogesh Kumar/Mint