The country’s industrial production was up 15.1 per cent in February on the back of expansion in mining, manufacturing and electricity generation. Though this growth is lower than the 16.7 per cent recorded in January, analysts and economists expect it to strengthen the case for a hike in key rates by the Reserve Bank of India (RBI) in its upcoming monetary policy review on April 20.
Industrial production was up 0.2 per cent in February last year. According to Goldman Sachs, though February’s IIP numbers have been “weaker than expected”, it believes RBI would hike the key policy rates by 25 basis points and cash reserve ratio by another 25 basis points on April 20.
While mining grew by 12.2 per cent in February, against a decline of 0.2 per cent in the same month last year, manufacturing climbed up by 16 per cent from 0.2 per cent last year. Electricity grew 6.7 per cent against 0.7 per cent last year, according to the official data released by the Central Statistical Organisation (CSO).
While analysts and experts see a low base effect as the main reason behind IIP’s acceleration, they did not rule out the growth in demand and consumption as a result of series of stimulus measures taken by the government across the board.
“Latest trends in non-oil imports and bank credit, coupled with buoyant numbers in autos and cement dispatches, also indicate the momentum is picking up. We thus maintain our 8.4 per cent gross domestic product estimate for FY 11. This factors in RBI increasing rates again in its policy on April 20, and cumulatively by an additional 100 basis points in 2010,” said Rohini Malkani, economist, Citibank, in a report.
RBI governor D Subbarao had earlier stated that there is a strong case of “hard landing” if the spiraling rate of inflation was not contained at the earliest. Last month, RBI took its first step to rein in inflation by increasing the reverse repo rate to 3.50 per cent from 3.25 per cent and repo rate to 5 per cent. The annual rate of inflation in February stood at 9.89 per cent, the highest since October 2008, when the global economic downturn started gaining momentum.
“Growth has bounced back really strong and that is a good sign but the worry is not so much about the near-term inflation. RBI has to normalize interest rates now and it is likely to hike both reverse repo and repo rates by 25 basis points. The main problem is if such a level of IIP is continued, then capacity constraints are going to emerge as a bigger problem by the second half of 2010, and then inflation will become an accelerated problem,” said Atsi Sheth, chief economist, Macro-Sutra.
Robust growth in demand for goods was reflected in the production index of capital goods--- such as, industrial machinery, agricultural tools and computer hardware systems--- which soared by a whopping 44 per cent in February from 11.8 per cent in the same month last year. Similarly, consumer durables like cars, fans, washing machines and air-conditioners, rose by almost 30 per cent from 6 per cent in February last fiscal.
“Core inflationary pressures are firming and there are risks that inflation remains higher for longer due to firm commodity prices, loose macro policies and the closing output gap. We continue to expect 125bp of repo, reverse repo and cash reserve ratio hikes between now and March 2011,” said Sonal Varma, India Economist at Nomura.