New Delhi: A surge in consumer durables and capital goods combined with the year-ago low base catapulted India’s factory output to the highest growth rate in 16 years in December, making it easier for the government to justify rollback of some of the fiscal stimulus measures provided to the industry during the economic downturn.

Graphic: Yogesh Kumar / Mint

The Index of Industrial Production (IIP) rose 16.8% in the last month of 2009 compared with a 0.2% contraction a year earlier, rising on the back of a series of three stimulus measures between December 2008 and February 2009. The government reduced Cenvat (Central value-added tax) by 6 percentage points to 8% and service tax rate to 10%, from 12%. However, the additional outgo in expenditure together with a revenue shortfall had led to a sharp spurt in the fiscal deficit to a record 6.8% of gross domestic product (GDP).

Earlier this month, data released by the government showed the country’s GDP may grow at 7.2% in year ending March.

Analysts say robust growth in factory output as well as merchandise exports will help finance minister Pranab Mukherjee to partially roll back tax incentives in the 2010 Union Budget, due on 26 February.

Mukherjee was expectedly buoyant about industrial production and its overall impact on the economy.

“I do hope that third quarter GDP figures will also be will get reflected in the overall GDP," he said on Friday.

Planning Commission deputy chairman Montek Singh Ahluwalia told reporters that even though industrial production may not grow at this rate month after month, “my hope is that next year we will show double-digit growth in industry. When you transit from a period of flat or very low output to recovery, then for some months the growth rates are very high and then they stabilize again to a normal level."

He expects the economy to grow at more than 8% in the next fiscal.

Nikhilesh Bhattacharyya, an associate economist at Moody’s, said in an advisory released on Friday that in the coming months, industrial production growth is expected to slow, mainly as the base effect wears off.

“In the final quarter of 2009, year-on-year production growth benefited from a low base effect, owing to a sharp slump in production during the corresponding quarter of 2008," he said. “Putting aside the fading base effect, industrial production growth is expected to remain strong and well above its long-term average."

Rohini Malkani, economist at Citigroup India, said in a statement that she expects GDP to grow at 8.4% in the next fiscal, “which factors in a partial rollback of the fiscal stimulus measures and a minimum 125 basis points of (Reserve Bank of India, or RBI) policy tightening". One basis point is one-hundredth of a percentage point.

Bhattacharyya said the surge in industrial production increases the chance of an earlier-than-scheduled rate hike by RBI as the current situation no longer necessitates a repo rate—at which banks can borrow from RBI—of 4.75% and a cash reserve ratio (CRR) of 5.75%, which are low by historical standards and more appropriate for a slow recovery scenario. CRR is the amount of funds banks have to keep as deposits with RBI.

“With industrial production growing at a record pace, capital goods production surging, business confidence high and foreign direct investment rapidly returning, there are now a number of signs that private investment is set for strong growth," Bhattacharyya said. “This should facilitate RBI putting a greater focus on inflation, which has been at a decade high based on both consumer and wholesale price measures."

While the manufacturing sector—which constitutes around 80% of industrial production—grew at 18.5%, consumer durables, a component of manufacturing, grew at 46%. Mining and electricity sectors also registered strong growth of 9.5% and 5.4%, respectively during December.

Going by use-based classification, capital goods made the strongest comeback, growing at a rate of 38.8%. Intermediate goods and basic goods grew at 21.1% and 7.5%, respectively during the same month.

One concern is the continued laggard growth in the consumer non-durables segment, which grew at 3.7%, mostly because of a contraction in output in sectors such as food products and beverages, and tobacco and related products.

Amit Mitra, secretary general of the industry lobby group Federation of Indian Chambers of Commerce and Industry, said industrial growth needs to be more diversified since some important sectors are falling behind others in terms of growth.

“The current growth seems to be driven by a few large sectors," he said. “We need to be cautious because this strong growth has come over the negative growth of 0.6% in December 2008 in manufacturing."

PTI contributed to the story.