Industry expands, gives hope of rebound

The index of industrial production rose 2.4 per cent in November.

Experts are divided over whether better-than-expected factory output in November 2008 marks an early indicator of recovery in industrial activity.

Data released by the Central Statistical Organisation (CSO) today showed that the index of industrial production (IIP) increased 2.4 per cent in November against 4.9 per cent growth in the same month of the previous year (see table).

India’s factory output had dipped to -0.3 per cent in October 2008, the first contraction in more than 15 years. November’s surge was led by a rebound in manufacturing, which has 80 per cent weight in the index.

Low growth rate in November 2007 also helped the IIP back into positive territory, a phenomenon known as the low-base effect. Higher output of consumer non-durables or fast moving consumer goods (FMCG) — which account for nearly a fourth of IIP — contributed to a higher number this time.

“Notwithstanding the positive IIP reading, activity continues to weaken sharply. The IIP series has been very volatile lately but the trend is clearly downwards. However, we are positively surprised by the strong number given that other coincident indicators point towards very weak activity in November,” said a note prepared by Tushar Poddar and Pranjul Bhandari of Global ECS Asia Research at Goldman Sachs.

The manufacturing sector expanded at the same level as the IIP, even as analysts expected it to post low growth. Within manufacturing, consumer non-durables expanded 7.3 per cent, against a dip of 2 per cent in the same month last year.

Among industrial groups, production of petroleum, rubber and coal products, having a 5 per cent weight in the index, expanded 30 per cent. Other industrial sectors that helped the IIP include beverages and tobacco products, basic metals, textile products as well as machinery and equipment.

A 3.1 per cent increase in electricity generation also gave the index some momentum. Mining, however, grew marginally.

The rebound in the IIP from the previous month comes at a time when exports dipped 10 per cent and commercial vehicle sales contracted 48 per cent.

IIP data also showed that capital goods production contracted 2.3 per cent compared with 24.2 per cent growth in the same month the previous year. Production of consumer durables, which include televisions, washing machines and refrigerators, contracted 4.2 per cent compared with a 5.5 per cent dip in November 2007.

Some experts say the IIP may recover after touching the historic low in October 2008. “We expect the IIP to see growth levels in the range of 2.8 per cent to 4 per cent in the remaining months of the fiscal year,” said Shubhada Rao, chief economist, YES Bank.

She points out towards economic indicators like the Purchasing Managers Index, which dipped 9 per cent and 12 per cent (month-on-month) in October and November, respectively, but only 3 per cent in December. “We expect the IIP to post growth of between 2.5 and 3.7 per cent in 2008-09,” she added.