Indian industry began the second quarter on a strong footing, clocking 13.8 per cent growth in July. The growth rate — the highest in two months — exceeded market expectations of moderation to 7.8 per cent. It was driven by a strong showing by the manufacturing sector, particularly the capital goods segment.
“The July figures are better than what I had expected. On the whole, taking together April-July figures, it suggests we are on track to achieve the (GDP) growth rate target… There might even be a case to marginally increase it,” Planning Commission Deputy Chairman Montek Singh Ahluwalia said.
Finance Minister Pranab Mukherjee was also enthused by the numbers and said it is good sign as high industrial growth would result in more job creation. “I expect the average industrial growth to be between 12 per cent and 13 per cent this year. Manufacturing, which generates employment, is doing well,” the minister said.
| ROBUST RISE Index of Industrial production | |||
| (%) | July ‘09 | June ‘10 | July ‘10 |
| General* | 7.19 | 5.8 | 13.8 |
| Mining | 8.74 | 8.5 | 9.7 |
| Manufacturing | 7.37 | 5.8 | 15.0 |
| Electricity | 4.21 | 3.5 | 3.7 |
| *Overall growth Source: CSO | |||
Industrial growth, as measured by the Index of Industrial Production (IIP), was estimated at 7.2 per cent in July 2009. For June this year, the growth rate was revised downwards to 5.8 per cent from 7.1 per cent estimated earlier. Apart from the dip in June 2010, industrial growth has consistently been in double digits since October 2009.
By sector, manufacturing clocked the strongest growth at 15 per cent in July, after a subdued 5.8 per cent in the previous month. Mining also registered a strong growth of 9.7 per cent, up from 8.5 per cent.
Growth in electricity generation stood at 3.7 per cent, marginally up from 3.5 per cent in June 2010, but lower than the 4.2 per cent in July 2009.
Capital goods grew by 63 per cent, compared with a low 1.7 per cent in the corresponding period of 2009. Production of basic goods was stable at 5.1 per cent, compared with 4.7 per cent last year. Twelve of the 17 industry groups recorded positive year-on-year growth in the month. Machinery and equipment other than transport equipment recorded the highest growth, 49.4 per cent, followed by other manufacturing industries at 31.1 per cent and transport equipment and parts at 24.9 per cent.
Analysts expressed concerns about the 0.5 per cent growth of the consumer non-durables category, which indicates the health of the rural economy. Consumer durables, which had led growth for the most part of the year, decelerated on a month-on-month basis to 22.1 per cent in July 2010, compared with 27.8 per cent in June 2010.
The strong overall growth came as a surprise to analysts, as most had expected it to slide given the statistical high base of 2009. Besides, industry has shown signs of deceleration in May and June. Many economists expect the July growth numbers to be revised downwards, with annual growth projected at 8.5- 9 per cent.
“Despite the base effect arising from strong growth in the equivalent period in 2009, industrial production growth far outpaced even the most optimistic forecast. Massive increases in capital goods production drove manufacturing activity,” said Matt Robinson, senior economist with Moody’s Analytics.
The faster-than-expected growth has also revived expectations of monetary tightening on September 16, when Reserve Bank of India presents its first 45-day review. Most economists expect a 25-basis point increase in policy rates by RBI in the review.
“Global uncertainty and signs of manufacturing activity slowing had split analysts regarding the prospect of further interest rate increases. The fact that India’s manufacturing sector has emphatically shrugged off previous interest rate rises, we expect a 25 basis point increase in policy rates,” Robinson adds.
Other economists termed the growth unsustainable going ahead and said that the rise can be termed a “blip” and not sustainable. “This is almost double market expectations… I do not see IIP growth beyond 9 per cent this year. These high numbers are not sustainable,” said DK Joshi, chief economist with ratings firm Crisil India.
Others said that there are high chances of a downward revision in the latest figures as lead indicators like exports, the core sector and cement off-take for July registered a deceleration. “The figures are not consistent with the other lead indicators from which we project the IIP number,” said Rupa Rege Nitsure, chief economist with Bank of Baroda.
