Ahead of the Budget, industrial production data issued on Monday provided some comfort to the government. It showed expansion at a seven-month high of 6.8 per cent in January, leaving room for the finance minister to concentrate on the fiscal deficit.
It was mainly the consumer non-durables sector (42 per cent growth) and within that, food products (92 per cent), besides the base effect, that pushed industrial growth from the dismal performance witnessed in recent months. The growth, though, was down from 7.5 per cent in January 2011.
December industrial growth was also revised to 2.5 per cent from provisional estimates of 1.8 per cent, leading some economists to question the IIP (Index of Industrial Production) data.
The encouraging January figure led some economists to forecast that the Reserve Bank might not cut policy rates at its monetary policy review scheduled for Thursday, even as interest-sensitive consumer durables production contracted 6.8 per cent in January. Intermediate and capital goods continued to be a drag. Their production contracted in January and this is likely to have repercussions on future industrial growth. In the broad category, mining output continued to fall, now for six months in a row. Electricity generation grew just 3.2 per cent, almost a third of the 10.5 per cent rise in January 2011.
In her address to the two Houses of Parliament, President Patil said a scheme for promotion of the capital goods industry would be launched during the 12th Five-Year Plan.
Capital goods production declined for the fifth month in a row, though the contraction decelerated in January.
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Finance Minister Pranab Mukherjee said, "(Data) show not much progress in capital goods, a matter of concern. Consumer non-durables had contributed substantially in this growth but not so much in consumer durables. Efforts will have to be made to build up these areas."
Over the first 10 months of this financial year, industrial production has grown 4.3 per cent, against a little over eight per cent a year before.
Economists said the Budget may now focus more on narrowing the fiscal deficit, expected to exceed the Budget target of 4.6 per cent of GDP by about a per cent point more. The objective of the government will be to move towards fiscal consolidation, said, C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council.
Business chambers, however, said the IIP data was too volatile and the government shouldn’t use only monthly data to decide on an excise duty rise.
In fact, nine sectors, including electrical machinery and apparatus, some other machinery and equipment, witnessed negative growth in January.
Agreeing that a month of high IIP data could not be used for drawing conclusions, Planning Commisison deputy chairman Montek Singh Ahluwalia said, ”If it looks like the downturn has come to an end, then we should certainly do better than seven per cent (economic growth) next fiscal." Advance estimates have pegged the economy to grow by 6.9 per cent this financial year.
Rangarajan said RBI’s decision on a policy rate cut will be based more on inflation data, which will come on Wednesday, just a day before the monetary review. “RBI has already taken a major policy decision in the form of a 75 basis point cut in CRR (banks’ cash reserve ratio)”, he added.
“The stronger than expected IIP growth in January reinforces our expectation that RBI would refrain from reducing the repo rate in the upcoming mid-quarter policy review,” said Aditi Nayar, economist, Icra. On the wide difference between provisional and actual IIP numbers, Madan Sabnavis, chief economist, CARE Ratings, said with such high volatility, the data did not seem reliable any more.