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Rediff.com  » Business » Factory output grows after 2-month decline

Factory output grows after 2-month decline

By BS Reporter in New Delhi
Last updated on: June 15, 2009 16:07 IST
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Industrial output expanded 1.4 per cent in April after two months of decline, leading experts to predict that the economy had bottomed out. A return to 8-plus per cent industrial expansion was, however, some time away, they added.

The IIP expanded 6.2 per cent in April 2008 but shrank 0.75 per cent and 0.72 per cent in February and March, respectively.

The April Index of Industrial Production beat analysts' expectations. A Reuters poll of economists had predicted a decline of 0.2 per cent in April.

The IIP would have expanded much faster but for a 35 per cent dip in food products, which brought down the growth rate 3.1 percentage points. AsĀ  result, manufacturing, which has a nearly 80 per cent weight in the IIP, registered muted growth of under a per cent.

Economists attribute the modest upturn partly to the government's stimulus packages, such as excise tax breaks and interest rate cuts.

This was partly evident from the 7 and 3.8 per cent growth, respectively, in electricity and mining, with weights of 10 per cent each.

"Electricity has a volatile growth trajectory and is not a steady indicator of economic growth. But cement output responding to government support is an unmistakable sign of recovery," said D K Joshi, principal economist with ratings and advisory firm Crisil Ltd.

In terms of user-based classification, capital goods, an indicator of private investment, contracted 1.3 per cent. Fast moving consumer goods (FMCG), which account for nearly a quarter of IIP, also declined sharply by 10.4 per cent, though consumer durables grew 16.5 per cent, possibly a reflection of higher spends from Pay Commission payouts.

However, both the capital and consumer goods indices showed sequential or month-on-month increases. For example, capital goods expanded 1.6 per cent sequentially against a 9.1 per cent decline in March.

Citing the high base effect and low level of consumer buoyancy, Indranil Pan, economist with Kotak Mahindra Bank, said: "Low demand levels lead to less investment in fresh production capacity. Foreign capital inflow is essential for robust capital growth."

Predicting that demand will pick up after September 2009, Goldman Sachs' analysts Pranjul Bhandari and Tushar Poddar said: "Several large investment plans that were mothballed in part due to election-related uncertainties will likely be put back in place. Our GDP growth forecast for FY10 is at 5.8 per cent with risks now to the upside."

"There will be an improvement in industrial output come October, but the 6 to 7 per cent growth rates of the boom time will not take place anytime soon," said Sumita Kale, chief economist at Indicus Analytics.

The revised annual growth for April-March 2008-09 stands at 2.6 per cent over the corresponding period of the previous year. It was previously estimated at 2.4 per cent.

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BS Reporter in New Delhi
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