Belying market expectations, India's factory production in November expanded by 11.7 per cent, the fastest in 25 months, rekindling a debate on whether stimulus provided to spur the economy should continue.
Part of the industrial growth, measured by the Index of industrial production, is no doubt due to a low base of last year as factory production expanded by just 2.5 per cent a year ago, but it is mostly attributable to stimulus-driven demand.
This is evident from the fact that manufacturing, the main gainer from stimulus, grew by 12.7 per cent, driven by 37.3 per cent expansion in consumer durable goods like auto, refrigerators, televisions etc.
HDFC Bank chief economist Abheek Barua: "As regards stimulus, there could be some withdrawal on the indirect taxes side. This could be required to make up for the fiscal deficit." Crisil principal economic D K Joshi said the government may start withdrawing stimulus, especially from sectors that are recovering like auto and consumer durables.
As part of stimulus, government had cut excise duty by six per cent and service tax by two per cent, besides stepping up Plan expenditure taking the total value of stimulus to Rs 1,86,000 crore (Rs 1,860 billion).
However, Cabinet secretary K M Chandrashekhar said: "Stimulus is now part of the overall scheme of things... it is not going to be one day there is stimulus (and) next day it goes."
Industrial growth stood at 3.8 per cent in the first quarter of this fiscal, 9.2 per cent in the second quarter and more than 10 per cent in the first two months of third quarter.
As such, if the trend is maintained in December, industry would expand at faster pace in the third quarter. "Industrial growth this year is going to be much better than last year. . .whether it will be 11.3 per cent for the next six months that is difficult to say," Planning Commission deputy chairman Montek Singh Ahluwalia told reporters in New Delhi.
"It (industrial growth) is very good. (I am) impressed. I expect the trend to continue," chief economic adviser Kaushik Basu said.
In November, mining output grew by 10 per cent. However, electricity generation rose by just 3.3 per cent, which could in fact apply brakes to industrial growth in future.
In quite contrast to consumer durables, consumer non-durables production rose by just 3.1 per cent in November against 12.4 per cent a year ago.
Intermediate goods expanded by 19.4 per cent against negative 3.9 per cent, capital goods by 12.2 per cent against 0.5 per cent, basic goods by 6 per cent against 2.2 per cent.
For the first eight months of this fiscal, industrial growth stood at 7.6 per cent against 4.1 per cent a year ago. However, belying better-than-expected industrial growth in November, the Bombay Stock Exchange benchmark Sensex closed lower by 104.20 points 17,422.51 points.
"I would certainly hope (the trend of IIP growth to continue). I don't see any reason why it should not continue. I am sure overall there is increase in demand, there is increase in production," the Cabinet secretary said.
Industrial growth numbers in November were more than expected as analysts were expecting industrial growth in the range of nine to 10 per cent.
With the third quarter likely to witness contraction in farm production, industrial recovery can make up for this decline and if services also remained robust, overall economic growth may certainly look to be quite high this fiscal.
"We will have to revise our GDP estimates for the year. It is currently 7 per cent, but we will revise 7.3 to 7.4 per cent," Barua said.
The mid-year economic review of the government has pegged the economic growth this fiscal at 7.75 per cent.
The economy grew by 7 per cent in the first half of this fiscal. With surging food inflation likely to impact the overall rate of price rise, RBI may now comfortably tighten liquidity. "We expect the RBI to hike repo and reverse repo by 25-50 basis points in the next policy but before that CRR may be hiked to 450 basis points," Joshi said.
The industrial recovery was quite broadbased as 14 industrial sectors of the total 17 considered for IIP posted positive growth.
Only beverages, tobacco, jute and other vegetable fibre textiles, leather and fur products registered a decline in growth.
Processed food products, which have been witnessing decline in growth, expanded by 8.9 per cent.
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