New Delhi:Industrial output made a surprise recovery in November, bouncing back from its first contraction in 15 years, but analysts expect the rebound to be short-lived given that external and domestic demand remain subdued.
Production at the country’s factories grew 2.4% in November after having shrunk by a revised 0.3% in the previous month, data released by the Central Statistical Organization on Monday showed.
In the first eight months of the current fiscal (April-November), the index of industrial production (IIP) rose 3.9%, compared with 9.2% a year earlier.
Also See Raised hopes
Output of the manufacturing sector, which accounts for around 80% of the IIP, grew 2.4% in November. Electricity and mining sector output rose 3.1% and 0.5%, respectively. During the month, production of capital goods and consumer durables shrank while the output of basic goods, intermediate goods and consumer non-durables saw positive growth.
Analysts say the November uptick in industrial production may prove to be all too brief in an economy that’s slowing as companies put investments on hold and consumers hesitate to spend. After average growth of 8.9% in the last four years, the economy is tipped by the government to expand 7-7.5% this fiscal.
“Positive growth in IIP does not take away the slowdown story. I do not think there are too many positives backing the IIP,” said Indranil Pan, chief economist with Kotak Mahindra Bank. “There could be further downside if global conditions and domestic equity market deteriorate. Today, the whole issue is more to do with sentiments. However, the fiscal stimuli and rate cuts might provide some cushion to growth.”
In a research report released on Monday, Goldman Sachs Group Inc. analysts Pranjul Bhandari and Tushar Poddar said part of the uptick in November might be explained by a low base in November 2007.
“However, we are positively surprised by the strong number given that other coincident indicators point towards very weak activity in November,” they added.
In November, exports fell 10%, while excise duty collections declined 15% and auto sales were down 18% compared with a year ago.
“All the bottom-up indicators like exports, excise tax collections and auto sales were pointing towards a more subdued IIP growth. A lot of the problem with liquidity that started in October spilled over to November. It is difficult to explain the growth in IIP in November,” said Abheek Barua, chief economist with HDFC Bank.
Goldman Sachs estimates that the Indian economy will grow 6.7% for 2008-09, and 5.8% for 2009-10.
Economists say there is further scope for rate cuts by the Reserve Bank of India, or RBI, which has aggressively lowered borrowing costs and pumped liquidity into the financial system to loosen a credit crunch and bolster economic growth. “Though it is difficult to predict when the rate cut will happen, it certainly will be more graduated than the earlier ones. However, the direction is unambiguously towards further rate cuts,” Pan added.
Goldman Sachs expects the RBI to lower its key policy rates by half a percentage each in its 27 January monetary policy review. It also expects a cut in the cash reserve ratio, or proportion of deposits that commercial banks must keep with the central bank, by 1.5 percentage points by mid-2009.
The central bank cut policy rates for the fourth time in less than three months on 2 January in a coordinated effort with the government announcing a fiscal stimulus package on the same day to spur growth and boost consumer demand.
In December, industrial output may again dip because of a higher base during the same month a year ago. Growth in auto sales declined 18% in December, when exports also likely slowed.
Pan expects industrial output to grow 2.5-3% in 2008-09 and 2.5% in 2009-10. Barua pegs his forecast for this fiscal’s industrial production growth at 4.5%.
Bloomberg and Samar Srivastava contributed to this story.
Graphics by Ahmed Raza Khan / Mint