First, there’s the base effect. As Kotak Mahindra Bank Ltd chief economist Indranil Pan said, in February 2008 “the manufacturing and the mining sector had grown at a healthy 7.9% and 9.6%, respectively, while the electricity sector had grown at 9.8%. As a result, manufacturing and the mining sector contracted sharply by 1.4% and 1.6%, respectively, in February 2009 while the electricity sector managed to record a marginal positive growth of 0.7%". February 2008 also had an extra working day.

Economists who independently come up with seasonally adjusted month-on-month numbers for the Index of Industrial Production (IIP) have pointed to an improvement. Nomura Financial Ltd’s Sonal Varma says that output rose 0.4% month-on-month on a seasonally adjusted basis, slightly higher than the comparable figure of 0.2% in January. According to Goldman Sachs ’s Tushar Poddar and Pranjul Bhandari, seasonally adjusted monthly momentum rose by 0.6% month-on-month in February, compared with 0.2% in January.

There are other signs of improvement. Of the 17 broad industry groups that make up the IIP, as many as eight showed growth in February. That’s against five industry groups that showed growth in January 2009 and seven that showed growth last December.

Having said that, the 10.4% growth in the capital goods index was a surprise and indicates that investment remains robust in certain pockets such as the power sector. The industry group called machinery and equipment other than transport equipment showed a growth of 15.6% in February. The growth is also the result of past orders getting executed as new capital expenditure is unlikely given that industry is now grappling with excess capacity. A study by ABN Amro Securities shows that while implementation of central projects remains unsatisfactory, tenders issuance picked up in February, especially for state transport projects.

To cut a long story short, the IIP numbers aren’t as bad as they look.

True, there are lots of headwinds and the March data on exports has been bad. But as Nomura’s Varma put it, “while another negative output reading is likely in March, we judge that the worst phase for industrial output growth may be close to over."

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