• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
  • Editorial Calendar 19-20
BW Businessworld

Not Quite A Turnaround

Photo Credit :

The January industrial production figures are the last important data to be released before the monetary policy announcement by the Reserve Bank of India on Thursday and the Union budget on Friday. Despite the fact that factory output grew much faster than expected, it is too early to say that the Indian industry has made a turnaround.

Industrial production gathered pace and grew 6.8 per cent in January, over the previous month, while car sales also hit a record high in February. This was the fastest pace in 7 months, powered by a surge in manufacturing including consumer non-durables, a sign of strength in a sluggish economy that reinforces expectations the RBI will wait until April before cutting interest rates. Deputy chairman of Planning Commission, Montek Singh Ahluwalia, said a good industrial output print for February also would mean India's economy is moving to a normal growth trajectory.

Industries body CII stopped short of saying that the IIP data marked a clear turnaround and made a case for lowering of rates by the Reserve Bank of India at the earliest opportunity particularly since many of the subsectors like capital goods at -1.5 per cent, intermediate goods at -3.2 per cent and basic goods at 1.6 per cent performed poorly. The pleasant surprise was the consumer non-durables sector, which grew at 42.1 per cent, indicating a strong demand. However, indicating the debilitating impact of high interest rates, consumer durables continued to be in negative territory.

CII also expressed concern as it appeared that the issue of coal linkage was catching up with the electricity sector which grew at only 3.2 per cent compared with 9.1 per cent in December. It also demanded that the current rates of excise are continued in the Union Budget to allow the manufacturing sector to recover from a full blown slowdown.

Production at India's factories, mines and utilities grew 6.8 per cent from a year earlier, the notoriously volatile data showed, the highest since June 2011.

Economists on average had expected growth of 2.1 per cent, a Reuters poll showed. The January figure compares with a revised annual rise of 2.5 per cent in December.

"The central bank is certainly going to wait for the budget and the government's borrowing programme for the next year and what is going to be the (fiscal) deficit number. That is why we believe the rate decision will happen in April," said Ashok Gautam, global head of markets at Axis Bank in Mumbai.

Car sales in February rose 13 per cent annually, the biggest rise in 10 months, as buyers rushed to showrooms ahead of a federal budget expected to lift the cost of car ownership.

Indian automakers sold 211,402 cars in February, data released by the Society of Indian Automobile Manufacturers (SIAM) showed, the biggest ever monthly total.

"A lot of people wanted to buy their cars before the budget, because they expect prices to go up after the budget," Vishnu Mathur, director general of SIAM, told reporters.

The benchmark 10-year 8.79 per cent, 2021 bond yield rose 2 basis points to 8.28 per cent after the data release, while the five-year swap rate and one year swap rates were up 4 basis points each.

During the month, 13 out of 22 industry groups witnessed growth. Output of basic goods went up by meagre 1.6 per cent, as against 7.7 per cent in the year ago period. However, intermediate goods witnessed a contraction of 3.2 per cent, as against 7.4 per cent growth in January last year.

During the April-January period this fiscal, the IIP growth stood at 4 per cent, as against 8.3 per cent in same period in 2010-11

Monday's industrial data kicks off a heavy week on the Indian economic calendar.

The Reserve Bank of India holds a monetary policy review on Thursday. On Friday night, it surprised markets with a 75 basis point cut in the cash reserve ratio for banks.

Many in the market expect it to wait until after the budget, to be delivered on Friday, before it starts cutting interest rates after raising them 13 times through October. The RBI has another policy review set for April 17.

On Wednesday, the government will release monthly headline inflation figures.

Production of consumer non-durable goods, including beverages and food product, jumped an annual 42.1 percent, up from 14 percent a month earlier.

Capital goods production, a proxy for investment, shrank for the fifth straight month, contracting 1.5 percent from a year earlier.

"Industrial activity has surprised largely on account of consumer non-durable goods, which suggests that recovery is not broadbased. Subdued capital goods output continues to increase the call for expediting measures to boost investment activity," said Upasna Bhardwaj, economist at ING Vysya in Mumbai.

Manufacturing output, which constitutes about 76 percent to industrial output, grew 8.5 per cent in January.

Mining production shrank 2.7 percent from a year earlier, its sixth straight contraction, reflecting the regulatory and environmental approval issues plaguing the sector.

Electricity generation rose 3.2 percent from a year earlier, slower than the 9.1 percent rise in the previous month.

India's economic growth slowed to 6.1 per cent, its weakest annual pace in almost three years in the three months to December, as high interest rates and rising input costs constrained investment and manufacturing.

India's economy is forecast to expand at its slowest pace in three years in the fiscal year that ends on March 31.

Meanwhile, Indian imports have continued to outpace exports in February as demand remained weak in major exports markets like the United States and Europe, nudging the government to revise up the full-year trade deficit projections on Friday.

A widening trade deficit will likely worsen India's current account deficit and further weaken the rupee.

Merchandise exports grew an annual 4.3 per cent to $24.6 billion in February, while imports grew 20.6 percent to $39.8 billion, Trade Secretary Rahul Khullar said on Friday, citing provisional trade data.

The trade deficit widened to $15.2 billion during the month, from $14.8 billion in January.Earlier last month, the Central Statistical Organisation (CSO) had estimated that the Indian economy would grow at a slower pace of 6.9 per cent this fiscal, as against 8.4 per cent in 2010-11.

The overall slow growth of IIP at 4 per cent during the April-January period, may prompt the Reserve Bank to cut short term lending and borrowing rates in the mid-quarterly review of the monetary policy on Thursday (rpt) Thursday, especially in view of easing inflation, experts said.

Industry officials have blamed the slowdown in growth to the high interest rate regime that has made borrowings costly and curbed consumer spending.

Prime Minister's economic advisory panel chief C Rangarajan has said that the policy rate cuts by RBI would depend on inflation movement.

Overall inflation has started showing sign of cooling off as cheaper food items pulled it down to a 26-month low of 6.55 per cent in January.

The apex bank in a surprise move had slashed Cash Reserve Ratio (CRR) from 5.5 per cent to 4.75 per cent on Friday, to infuse Rs 48,000 crore to ease the liquidity crunch in the financial system.

RBI had last reduced CRR by 0.5 percentage point on January 24 as well, injecting Rs 32,000 crore into the system.

(With Agencies)