India’s industrial output grew at a faster rate of 7.1 per cent in July this year surpassing consensus estimate by a wide margin mainly on account of higher production of capital goods and consumer durables.
This is the best monthly growth in the current fiscal and by some estimates industrial production may rise in the coming months as nearly 4.6 million government employees start receiving higher salaries and arrears on account of the implementation of the Sixth Pay Commission award from this month onwards.
Traditionally, the festival season, which starts in October, sees higher consumer spending and economists expect IIP growth to pick up as manufacturers ramp up production capacities to meet demand.
| SPARKS OF RECOVERY Index of Industrial Production in July | ||||
| Sector | July 07 | July 08 |
Overall | |
Overall
Source: Central Statistical Organisation
However, despite the July increase, the cumulative increase in industrial growth for the first four months of the current fiscal stood at 5.7 per cent against 9.7 per cent in April-July 2007.
Economists are now divided on whether the central bank will raise interest rates again given that inflation has fallen for the third consecutive week to 12.1 per cent and growth in manufactured goods was better than expected.
In the current fiscal, the Reserve Bank of India has raised its key lending rate, the repo rate (the rate at which it lends to banks), 150 basis points to 9 per cent.
“The July number is now more realistic,” said Dharmakirti Joshi, economist with Crisil, a rating and advisory firm. “The May and June numbers were a bit low. We had felt that industry was growing at a much faster rate.”
Crisil is maintaining its earlier growth projection of 7.5 per cent growth in the Index of Industrial Production (IIP) in the current fiscal.
“The current slowdown is the effect of monetary tightening that started in 2006. The impact of the recent rate increases will be seen next year,” Joshi said, adding that he expects a small rate increase by RBI.
Manufactured goods constitute around 20 per cent of India's economic output, but determine nearly two-thirds of the Wholesale Price Index (WPI). This headline inflation measure does not take into account the burgeoning services sector, which accounts for over half of India’s gross domestic product (GDP).
In terms of use-based classification, capital goods and consumer durables were the two top performers in July 2008, posting a growth rate of 21.9 per cent over 12.3 per cent same month last year and 11.2 per cent as against a decline of 2.7 per cent respectively
“Details [of capital goods growth] are unavailable but could be attributed to lumpy orders and back-logs getting cleared,” wrote Citigroup Global markets analysts, Rohini Malkani and Anushka Shah in a report today.
The decline in commodity prices and moderation in inflation has raised the odds of the central bank keeping its benchmark interest rate on hold, they added.
Citigroup maintains its 7.5 per cent GDP growth estimate for 2008-09.
In terms of industry-groups, 10 out of 17 sectors posted a positive growth rate with beverages, tobacco and related products registering the highest monthly growth of 28.6 per cent.
Goldman Sachs analysts Tushar Poddar and Pranjul Bhandari reiterated their earlier view that the July industrial production supports their thesis “that in the current fiscal, growth is moderating rather than slowing sharply”.
Goldman Sachs maintained its GDP growth estimate at 7.8 per cent for the year.
