Industrial growth at 2-yr high on durable stimulus

Backed by government stimulus measures and a low base effect, growth in industrial output touched a two-year high in November 2009. The index of industrial production (IIP) grew 11.7 per cent, primarily due to growth in manufacturing (12.68 per cent in November as against 2.7 per cent last year), fuelling a debate on withdrawal of fiscal and monetary stimulus measures.

Consumer durables, a sub-index of manufacturing, grew 37.3 per cent and capital goods posted 12.2 per cent growth in November 2009, as against 0.3 per cent and 0.5 per cent, respectively, in the corresponding period in 2008.

Consumer goods grew 11.06 per cent. Consumer non-durables showed deceleration of 3.14 per cent as against 12.4 per cent in November 2008. Mining and electricity also posted a growth of 9.97 per cent and 3.28 per cent, respectively, as against 0.7 per cent and 2.6 per cent last year. Basic and intermediate goods continued to post robust growth of 5.98 per cent and 19.37 per cent, respectively.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said the growth in IIP in the current fiscal would be more than that achieved in the previous financial year.
 

FACTORY OUTPUT UP 11.7%
Indices that fuelled Nov 2009 rise:

* Manufacturing 322.6 (12.70% growth over ‘08)

* Mining 192.9 (10% growth over ‘08)

* Electricity 223.5 (3.3% growth over ‘08)

“The IIP numbers indicate that the economy is out of the woods and both investment and consumption are on a recovery path,” Planning Commission member Saumitra Chaudhary said.

Overall, IIP grew a meagre 2.5 per cent during the corresponding month in 2008 and 10.35 per cent in October 2009. The cumulative IIP growth rate for April-November 2009 stands at 7.6 per cent as against 4.1 per cent in the corresponding period of 2008-09.

Economists see the numbers more as an impact of government measures and low base effect.

“The growth in industrial production underscores the impact of the government stimulus package in boosting demand, even as low base effect continues to play a role,” said Yashika Singh, head, economic analysis, Dun and Bradstreet.

“Improving consumer confidence can be seen by the growth in consumer durables sector. The growth in capital goods sector is promising and points towards restoration of investment activity. Growth in consumer non-durables continues to remain low reflecting demand dampening effect of high food inflation,” she added.

Experts feel stimulus measures should be continued for some more time and the Reserve Bank should maintain soft policy rates (repo and reverse repo). “Even though growth is much stronger than expected, credit growth has been lacklustre. So, I do not expect RBI to revise the policy rates for the time,” said Rupa Rege Nitsure, chief economist, Bank of Baroda. She added, “This, though I think CRR might be raised by around 50 basis points (in the third quarter monetary policy review), along with other non-conventional liquidity mop-up.”

Federation of Indian Chambers of Commerce (FICCI) and Industry president Harsh Pati Singhania felt the pattern of growth seen in the sub-sectors of industry indicated positive response of the industrial sector to stimulus measures and a sudden withdrawal of stimulus should be avoided.

He added that the growth numbers were in a way slow responses to the stimulus measures that were introduced in the wake of the global economic crisis. “Consumer durables growth is a result of fiscal sops introduced by the government last year and the softening interest rate regime that followed the reduction in policy rates by the central bank,” he said.

Experts, however, question the sustainability of such high figures and state adverse effect of lower kharif output on rural consumption and rising oil prices as the major macroeconomic risks to continuance of high industrial growth rate.