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New Delhi: The country’s industrial output expanded for the seventh month in a row, reaffirming that the worst is over for the economy and that the effects of three fiscal stimulus packages initiated by the government since December and the six rounds of interest rate cuts by the Reserve Bank of India since September 2008 have had their effect.

Economists, however, cautioned that the drought, which has affected large tracts in the country, could push up food prices and also pose downside risks to growth.

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Data released by the Central Statistical Organisation (CSO) on Friday showed that the Index of Industrial Production (IIP) grew 6.8% in July, higher than the 6.4% growth registered during the same month a year ago.

Graphics: Ahmed Raza Khan / Mint

While both intermediate goods and consumer goods grew faster than during the previous year, the capital goods segment, which was shrinking till May this year, continued its positive momentum since June.

The growth in consumer goods was led by a sharp revival in consumer non-durables, which grew by 5%—an eight-month high.

The recovery in factory output was also broad-based in July, with 15 out of 17 industry segments registering growth.

The manufacturing sector, which accounts for about 80% of the production basket, recorded a 6.8% growth, compared with 6.9% in July 2008, while the electricity sector grew 4.2% against 4.5% in the same month last year.

The mining sector posted a robust growth of 9.9% against a tepid growth of 2.8% a year ago.

Economies across Asia are beginning to show signs of recovery from the worst global recession since the Great Depression.

The Organisation for Economic Co-operation and Development (OECD), a grouping of rich nations, which on Friday released its composite leading indicators (CLIs) for July, also said that “clear signals of recovery are now visible in all major seven economies, in particular in France and Italy, as well as in China, India and Russia".

While CLI for India increased by 1.3 points in July, 1.1 points lower than a year ago, CLI for China increased 1.5 points in the same period, 0.7 point lower than a year ago.

CLI gives an advance view on economic activity.

“This is for the second consecutive month that IIP clocked higher growth than its corresponding month a year ago when the economic scenario was much stable, thus substantiating the proposition that recovery of Indian economy is foreseeable," said Soumendra K. Dash, chief economist at CARE Ratings.

Gaurav Kapur, senior economist at ABN Amro Bank, thinks a period of consolidation in industrial production has started, which may continue for at least another quarter.

“However, higher food prices and a drought may act as a dampener and may prolong the consolidation period," he said.

The Purchasing Managers’ Index, Kapur said, has indicated that inventories are beginning to be pared down from July; till June, companies were building up inventories.

“The strong IIP numbers seen in June and July coupled with the base effect kicking in from October could result in industrial growth surprising on the upside. At this point, it appears that the government’s stimulus measures are offsetting the drought impact," Rohini Malkani, economist with Citigroup India, said in an advisory note.

However, HDFC Bank Ltd chief economist Abheek Barua thinks IIP growth would not sustain at the current level. “We don’t see a clear pattern as yet. There are imminent risks going forward. We have not seen the impact of drought as yet. The credit offtake has also not increased. We may see industrial sector grow at 5-6% this year," said Barua.

However, ABN Amro’s Kapur said bank credit growth may not give the broader picture as non-banking sources of funding such as external commercial borrowings and equity markets have picked up.

Monsoon activity has picked up in recent weeks, with the cumulative rainfall deficiency now at 20%, down from 29% in mid-August. “This, coupled with the improvement in water levels in reservoirs, 51% of full storage capacity versus 66% last year, is encouraging and bodes well for the (rabi) winter crop," Malkani said.

However, with 278 out of 593 districts now drought-hit, Malkani felt that damage to summer crop (kharif) sowing may have already been done, with crop sowing down 7.2%.

Finance minister Pranab Mukherjee on Monday said the second and third quarters of the current fiscal year are unlikely to see the economy expanding at the pace it did in April-June period, but he stuck to the government’s original growth forecast of above 6% for the current fiscal year.

India’s economy grew at 6.1% during the first quarter of the current fiscal.

The industrial revival also depends on how quickly developed countries, especially the US, recover, Kapur said.

Exports have been a significant contributor to the manufacturing sector. India’s exports continued to shrink for the 11th month in a row, though the contraction rate declined to 19.7% in August.

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