New Delhi: India’s industrial output expanded at its fastest pace in 16 months in June, beating forecasts by a wide margin, as higher salaries of government employees and stimulus spending boosted consumer demand.
Economists said strong momentum in factory output could help mitigate the effects of a poor monsoon season on overall economic growth, but cautioned that the brisk rate of industrial activity might not be sustainable despite other recent positive signals.
“Although the June production number could well prove something of an aberration, bearing in mind just how strong it was, the trend in industrial output is clear,” said Robert Prior-Wandesforde, senior Asian economist at HSBC in Singapore.
Some economists have warned that growth in Asia’s third-largest economy could be pared by as much as 2 percentage points this fiscal if rainfall remains inadequate in the current sowing season.
Several indicators of consumption and investment demand such as the Purchasing Manager’s Index and motor vehicle sales have been showing significant gains, Goldman Sachs said in a note. Financial conditions have also continued to loosen over the summer, which mitigates the negative impact from a contraction in the agricultural sector due to weak monsoons, it said.
Factory output in June rose 7.8% from a year earlier, expanding for the six straight month based on revised figures and outpacing a rise of 2.2% in May as New Delhi ploughed investment into infrastructure projects and spent more on rural jobs.
The output growth rate is the highest since February 2008 and far exceeded the forecast of 3.3% in a Reuters poll.
The 30-share BSE index pared losses but the rupee rose and then weakened slightly after the data, while benchmark bond yields rose marginally.
At its 28 July policy review, the central bank raised its inflation forecast for the fiscal to around 5% from 4%, but also signalled its intention to stick to its policy of easy money for the near term as it helps the government manage a record $95 billion (Rs459,800 crore) borrowing plan.
Wednesday’s strong industrial number would not be enough to trigger a move towards monetary tightening, said Gunjan Gulati, economist at JPMorgan Chase and Co. in Mumbai. “We need to see continued and sustained strength in these economic indicators for the central bank to begin normalizing its policy stance.”
Mining output increased by 15.4% in June and manufacturing output rose by 7.3%, while electricity generation clocked an 8% growth.
“It looks like industrial output is being driven by strong domestic demand, though the poor monsoons may have a restraining impact. But this shows recovery is well underway,” said A. Prasanna, economist at ICICI Securities Primary Dealership Ltd.
Data published earlier, including that of automobile production, had already indicated industrial output would expand in June, even though exports faltered. The infrastructure sector grew 6.5% from a year earlier after 2.8% in May. Exports fell an annual 27.7% in June to $12.8 billion, the ninth straight monthly fall. Weak exports augur poorly for manufacturing even though domestic consumption, at 57% of gross domestic product, accounts for the lion’s share of total demand in India.
Signs of expansion continued in July, with car sales rising by a blistering 31% and a survey by Markit Economics showing manufacturing activity expanded for the fourth consecutive month.