Record industrial growth strengthens case for stimulus exit

India’s industrial output recorded the highest growth for a single month in December 2009 in the 19 years.

With the Index of Industrial Production (IIP) rising 16.8 per cent on the back of record manufacturing growth, the pressure has increased on the government and the Reserve Bank of India (RBI) to consider an early exit from the stimulus measures of the past 15 months.

Manufacturing, with an almost 80 per cent weight in the index, grew 18.46 per cent compared to a 0.6 per cent decline in the same month in 2008.

The electricity sector, however, grew far more slowly at 5.4 per cent (up from 1.59 per cent a year ago), prompting analysts to suggest that the industrial recovery was not broad-based enough to merit an immediate withdrawal of stimulus measures.

The mining sector’s 9.5 per cent growth was below double-digit levels, recorded three times in the previous six months, but much higher than the 2.17 per cent growth achieved in December 2008.

Manufacturing growth was propelled by the robust performance of capital goods (38 per cent), consumer durables (46 per cent) and intermediate goods (21.7 per cent). In sharp contrast, consumer non-durables grew only 3.7 per cent, once again pointing to the narrow base of the industrial recovery.

	Mining	Mfg	Elcty	General
2008-09	2.6	2.8	2.8	2.8
2009-10	8.5	9	5.8	8.6
(Apr-Dec)

The low base effect — industrial output in December 2008 fell a quarter per cent — also contributed to the record December numbers. On a month-ago basis (with no seasonal adjustments), however, the December 2009 performance showed an industrial growth rate of 10.81 per cent, the highest since the industrial slowdown began in the third quarter of 2008.

On a month-ago basis (with no seasonal adjustments), however, the December 2009 performance showed an industrial growth rate of 10.81 per cent, the highest since the industrial slowdown began in the third quarter of 2008.

Finance Minister Pranab Mukherjee expressed satisfaction at the numbers and said the third-quarter GDP growth numbers would be strengthened by the IIP figures. “It is quite encouraging and I do hope that the third-quarter GDP figures will also be encouraging…It will get reflected in the overall GDP,” Mukherjee told reporters.

Mukherjee’s statement comes after several positive economic indicators were released during the week, all of which augured well for private investment prospects. These indicators included the sharp rise in the business confidence index to a two-year high, a 14 per cent growth in exports and a healthy flow of foreign investments estimated at over $20 billion in the first nine months of the current financial year (compared to $21 billion last year).

Exuding similar optimism, D K Joshi, Crisil India’s principal economist, said: “It is definitely better than any forecast. The high growth in manufacturing and consumer durables have been sustained and that is a big positive surprise”. 

Joshi added a caveat, however, observing that “The data is getting more and more broad-based but it still continues to be quite narrow”. He also pointed out that the base effect had  a role to play in the December numbers and sustaining the high level would be difficult even though the month-on-month growth would continue.

Jyotinder Kaur, economist with HDFC Bank, differed. “The numbers are encouraging because they clearly point to a sequential spurt and it is across the board. Considering the strong performance in the past few months the numbers have reached a level where they are not purely driven by stimulus measures. So the growth, even though not this high, can be sustained with a gradual pull back of the stimulus,” said Kaur.

Some analysts also suggested that the number might lead to a rise in policy rates by the RBI before the fourth quarter policy rates.

“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. This should facilitate the RBI putting a greater focus on inflation. The current situation no longer necessitates a repo rate of 4.75 per cent  and a cash reserve ratio of 5.75 per cent, which are low by historical standards and more appropriate for a slow recovery scenario,” said Nikhilesh Bhattacharyya, economist with Moody’s economy.com.

The cumulative growth rate for April-December of the current financial year stands at 8.6 per cent against a low 3.6 per cent during the corresponding period in the previous fiscal. Industrial growth, on a cumulative basis, for the third quarter of the current fiscal stands at 13 per cent,compared to one per cent in the comparable period last year.

Consumer durables led the growth in manufacturing by expanding at a significant rate of 46 per cent in December 2009. The sector had contracted 4.2 per cent in the corresponding period in 2008. Consumer non-durables also showed a marginal acceleration in growth rate at 3.7 per cent compared to 3.2 per cent last year.

Intermediate goods, which were the worst hit due to the downturn and had contracted 8.9 per cent in December 2008, also posted a robust growth of 21.7 per cent in December 2009.