IIP growth in April nears 20-yr high

Indian industry began this financial year on a strong foot, with robust growth of 17.6 per cent in April. This has surpassed analyst expectations and fuelled concerns of a rate hike by the Reserve Bank of India (RBI).

The April figure is a four-month high and is close to the 20-year high of 17.7 per cent recorded in December 2009. Industrial growth has consistently been in double digits since October.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said the data indicates government policy is working well. "Let us just take a little bit of joy by the fact that the policy is working ...positive attitude towards investment has succeeded," he  said.

On the pace of withdrawal of the stimulus given to industry to combat the impact of the global financial crisis, he said: "It's going quite well. I do not think it needs to be swiftened (sic)."

A significant increase in production of capital goods led growth in manufacturing during April, though analysts expect overall industrial growth to slow down to single digit after August after the low statistical base effect wears off. Industrial growth, as measured by the Index of Industrial Production (IIP), was 1.13 per cent during April 2009 and 13.93 per cent this March.

"The growth figures have been much beyond our expectations. The growth cannot be sustained at this level and I expect it to come down to single digits in the later half of the year," said D K Joshi, principal economist with research and ratings agency Crisil India.

Analysts see the growth also getting increasingly broad-based, even as the statistical low-base effect has played a part in raising the numbers.

The numbers are in line with the recently released gross domestic product  growth figures, which showed 8.6 per cent expansion in Indian economy between January and March 2010. Robust consumer demand has been driving the growth; one evidence is the 30 per cent increase in car sales last month. HSBC's manufacturing measure, the Purchasing Manager's Index, had also grown at its fastest rate in over two years in May.

With a high and consistent growth, economists are divided on expectations from the RBI. Some see the status quo being maintained on policy rates till the next monetary policy review expected on July 27. "A 25-basis point increase in policy rates is likely during the review. An increase before the review will happen only if inflation reaches 10-11 per cent," Joshi added.

Others expect an increase of 25 basis points in the repo and reverse repo rates prior to the July review, after the inflation data for May comes out on June 14.

The spike in industrial production will increase pressure on RBI to quicken the thus far gradual pace of policy rate hikes.

"RBI has been wary of aggressively hiking rates, as inflation has been mainly driven by supply-side factors beyond a central bank's control, while the external outlook remains uncertain," said Nikhilesh Bhattacharyya, associate economist, Moody's Analytics. "However, with industrial production growing at a stronger than expected pace and credit growth beginning to pick up in recent months, the chance of an inter-meeting rate hike by RBI has increased." Bhattacharyya sees the recent surge in business investment gathering steam and adding to non-food inflationary pressures.

Chief economist of Bank of Baroda Rupa Rege-Nitsure said the flow of funds from the capital markets, credit growth and sectoral deployment of funds reflected a high level of confidence. But the "labour intensive and export dependent sectors were still showing relatively weaker growth," she said.

Manufacturing in April grew at 19.4 per cent as against a meagre 0.4 per cent during the corresponding month in 2009. Mining and electricity also posted strong growth rates of 11.4 per cent and 17.6 per cent, respectively, as against 1.1 per cent and 3.4 per cent during the year-ago period.

The growth in manufacturing was primarily guided by a 72.8 per cent growth in capital goods, which had posted a decline of 5.9 per cent in April 2009. Basic and intermediate goods grew at 8.8 per cent and 10.8 per cent, respectively.

Consumer goods continued their robust growth rate, with 14.5 per cent increase in production as against a decline of 4.6 per cent in the corresponding period last year. Consumer durables grew at 37 per cent during the month, as against 17.6 per cent in the corresponding period in 2009. Consumer non-durables, which had posted muted single-digit growth through the previous financial year, saw significant acceleration in growth at 6.6 per cent, against minus 10.5 per cent last year and 3.3 per cent in March this year.