July factory output beats expectations

July factory output beats expectations

New Delhi: Fears that industrial output was slowing were allayed as new data showed that factory output had grown in July around 6 percentage points faster than market expectations.

This stellar performance could lead to the government and private agencies to raise their estimates for economic growth in the current fiscal year and strengthens the case for an interest rate increase next week, when a Reserve Bank of India (RBI) policy review is due.

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Factory output grew 13.8% in July, driven by a huge jump in capital goods. The strong Index of Industrial Production (IIP) growth came over a high base of 7.2% growth last July. However, the Central Statistics Office (CSO), which releases the data, revised downward the April and June figures of IIP to 15.2% from the original 16.5% and 5.8% from 7.1%, respectively.

“The July data could change the entire IIP growth trajectory for the rest of the fiscal year. This is such a large deviation from the trend that it could potentially have an impact on all growth projections for the year," said Samiran Chakraborty, chief economist with Standard Chartered Bank.

Planning Commission deputy chairman Montek Singh Ahluwalia indicated that the government may formally raise its economic growth estimate for the fiscal.

“India’s July factory output figures were better than expected and there is a good case for the government to marginally increase its economic growth target for the current fiscal year," he told reporters.

Earlier this month when government data showed the economy grew at the fastest pace in 10 quarters at 8.8% during the first quarter (April-June) of the fiscal, finance minister Pranab Mukherjee had said that the economy may grow at 8.75% against the earlier projection of 8.5%.

Mukherjee on Friday pegged industrial expansion at 12-13% this year.

“I expect average industrial growth to be between 12-13% this year. Manufacturing, which generates employment, is doing well," he told reporters.

Capital goods output, which is a proxy for fresh investments by companies, has been primarily responsible for the recent recovery in the industrial output. However, the 63% growth registered in July took analysts by surprise.

“Something funny is happening out there. This could be due to bunching up of capital goods expenditure in one month," Chakraborty said. This is corroborated by the fact that the June figure for capital goods has been revised downward from 9.7% to -0.3% and the investments of June may have got reflected in July.

“The high growth rate in capital goods could be due to robust performance by some sectors like machinery and equipments, and automobiles. We will have to wait and watch for one or two months to see whether this is a one-time phenomenon or a continuous one," said S.K. Das, director general of CSO.

Consumer durables continued its robust growth rate at 22% in July. “This could be because there is pickup in spending by urban India. And this is not confined to the automobile segment only," Standard Chartered’s Chakraborty said.

Monthly car sales in the country surged to an all-time high in August growing at 33% outpacing the July record, according to data released by the Society of Indian Automobile Manufacturers.

However, industrial recovery remains skewed, as growth in consumer non-durables continues to lag. In June, it grew at 0.5% while overall growth during the fiscal (April-July) remained at 2.1%.

“This could be because of prevailing high inflation rate. Rural consumption demand has also not picked up vis-a-vis demand in urban India," Chakraborty said.

Economists also feel RBI may raise key policy rates in its mid-quarter policy review scheduled on 16 September as growth remains strong and inflation is hovering around 10%.

“Taking into account trends in non-food credit, non-oil imports, inflation and growth, we expect RBI to hike in its review on 16 September and maintain our view of a further 50 basis points of tightening in 2010. This would take the repo and reverse repo rate to 6.25% and 5% by December 2010," said economists Rohini Malkani and Anushka Shah of Citigroup India in a report.

RBI infuses cash into the system at the repo rate and sucks out money at the reverse repo rate. The money that banks must keep with RBI is the cash reserve ratio.

Senior economist Matt Robinson of Moody’s Analytics also expects a 25 basis points increase in policy rates. “Aggressive monetary tightening by RBI was expected to subdue demand for capital and consumer goods, suggesting industrial production could remain below trend for several months. The 63% increase in capital goods production emphatically debunks this logic, even if most of the second half of the theory held up," he said in a research note.

“Government and RBI are watching. Let us see. We will take actions as the situation demands," Mukherjee said when asked whether the central bank will further tighten monetary policy to combat inflation.

Graphic by Paras Jain/Mint

PTI contributed to this story.