India’s factory output in October grew at its fastest pace in over a year, government data showed on Wednesday. The Index of Industrial Production (IIP) grew 8.2 per cent in October, compared to a shocking 0.4 per cent contraction in September, beating analyst estimates of a 5.4 per cent growth.
While most analysts felt that the figures showed an improvement in the economy for the last quarter, some remained cautious about the veracity of the data.
Here is what experts said:
C Rangarajan, Chairman of Prime Minister’s Economic Advisory Committee:
The number is welcome. It is a cheerful number. I think the second half of this year will be good, better than the first half. Overall industrial growth is around 7 per cent. Therefore we may or may not be able to see growth of 8 per cent in October, but a growth in the region of 7 per cent is still acceptable.
The effect is combined of improvement in some sectors. I believe that it is the combined effect of low base plus a good growth in some sectors.
On CPI number: That is not a comfortable number. But we should have to wait for wholesale numbers that come out in a few days and then decide. The room for monetary policy will be determined by the trend of wholesale numbers. If it shows declined trend, then it’s good. Otherwise, we will have to wait until January.
Madan Sabnavis, Chief Economist, Care Ratings:
What we are seeing today in the manufacturing sector is a better month, that too because it is the festival season. I would be cautious in the sector, because at the ground level, production is still low. Are people investing for buying goods? I would say no.
Probably in Jan policy, we will be a 25 bps rate cut probably on the basis of easing WPI. CPI will continue to be high. Probably a follow up of another 25 bps in March and another 50 bps in the second half of the calendar year. They will be focusing more on open market operations.
Abheek Barua, Chief Economist, HDFC Bank:
The IIP growth reading that came out earlier today printed in at 8.2 per cent – a remarkably strong reading, especially for a market that has grown accustomed to flat or negative IIP growth prints. The October growth print marks a dramatic jump over the –0.7 per cent reading in September and an average growth rate of 0.1 per cent in H1FY13. This jump, however, was not entirely unexpected. The market was already anticipating a growth rate of 4.5–5.0 per cent in October propped up by a favourable base. Diwali last year fell in the month of October leading to a truncated work schedule and pulling down growth to –5.0 per cent from 2.5 per cent a month ago. That said, while the October jump was perhaps already in the price, its magnitude was not. At 8.2 per cent the IIP growth reading has clearly surprised to the upside–even adjusting for the base.
There is scope for downward revision. If the fine print suggests that it is on the back of two or three sectors which have shown really good growth. Then we should question the veracity of the numbers.
For the year as a whole, we have a number of 3 per cent. Some improvement in the second half, but nothing spectacular. We are building in about 75 bps of repo rate cut – three staggered rate cuts. Certainly some action, but not as aggressive as in 2008.
Shashank Srivastava, ED, Maruti Suzuki India:
Demand post Diwali has not been so great. Fuel price continues to be high. I think it will be difficult to continue the pace going forward. The base is so high, that I think that achieving a higher growth will be difficult. It is not likely to be as high as these figures show for the auto sector.
It is only short term that we are looking at this. In the long term, we are looking at very good growth, very robust figures, in fact.
H M Bangur, MD, Shree Cements:
It is a very good sign. It shows that in the coming two-three months, whole economy will grow. We are very happy with IIP production (for cement sector). GDP will also be like this. But one month is fine. What matters more is the cumulative number for the last three months.
The first stage of projects are finishing – talks, interest, etc. Activity in thr ground is comeing. But it is not converting into immediate demand. It will show in the coming few months.
Brinda Jagirdar, Chief Economist, State Bank of India:
To a large extent the uptick in industrial performance is optical, masking the reality, largely because of base effect. I don't expect this kind of buoyancy in manufacturing to sustain going forward as five industrial sectors are showing negative growth. I don't think the RBI (Reserve Bank of India) should be swayed by this number and should address the underlying weakness in the economy by cutting rates.
A. Prasanna, Economist, ICICI Securities Primary Dealership Ltd:
We should be careful in not over-interpreting this number. With some shifting of festivals in October and more number of working days, we should see some payback in November. Already, we saw the auto sale numbers, which were not encouraging, and maybe that will reflect in the overall industrial production numbers for November.
That said, there are enough signs of optimism. A lot of supply side issues that were there last year, seem to have gone away. In a sense, the IIP number that we saw in September showed a bottoming out, and we may see expansion month after month from here.
If this kind of number sustains, then the situation on growth may not be alarming, in the sense there is going to be some recovery.
Sujan Hajra, Chief Economist, Anand Rathi Securities:
We were expecting a seasonal recovery in the second half. Manufacturing and core sector growth have bottomed out but the slowdown in services continues. I stick to the fiscal year IIP growth target of 4.6 percent.
However, with inflation likely at 7.8 percent in November, a rate cut is ruled out in December. I do not expect any CRR (cash reserve ratio) cut also as the government is maintaining large cash balances with the RBI.
Sonal Varma, Nomura:
India’s industrial production (IP) grew at a higher-than-expected 8.2 per cent y-o-y in October from a downwardly revised -0.7 per cent in September (Consensus: 5.1 per cent; Nomura: 6.8 per cent). A sharp rebound in IP was expected due to positive base effects as the Diwali festival fell in October last year (and November this year) causing a loss in working days and a drop in IP growth last October (-5 per cent y-o-y). The uptick came as all sub-segments improved, with capital and consumer goods posting a particularly sharp rebound. The 3-month moving average also picked up this month (3.2 per cent y-o-y versus 0.5 per cent in October). However, we would not read too much into today’s rebound as we expect the positive base effects of October to work in the opposite direction next month, causing IP growth to contract in November. With global demand weak and the domestic investment cycle still subdued, we believe that underlying industrial demand remains weak. We would describe the industrial cycle as stabilizing and expect only a shallow recovery.
Meanwhile, CPI inflation rose by 9.90 per cent y-o-y in November from 9.75 per cent in October, broadly as expected, due to higher food prices and sticky non-food inflation. Inflation, therefore, remains a concern.
Aditi Nayar, Sr. Economist, ICRA Ltd:
The pickup in industrial growth in October 2012 was largely in line with our expectations (7.5 per cent), given the benign base effect, the change in the festive calendar in 2012 and the higher number of working days in October 2012 as compared to October 2011. However, this uptick is unlikely to sustain and industrial growth is expected to moderate sharply in November 2012 relative to the 8.2 per cent expansion estimated for October 2012.
In our view, it would be analytically appropriate to consider average growth for October-November 2012 rather than individual growth rates for each of these months given the base effect.
The 13 per cent growth of consumer goods in October 2012 partly reflects inventory build-up to meet the festive season demand.
Given the IIP print for October 2012 and the anticipated pickup in wholesale price inflation in November 2012, we expect the RBI to retain the repo rate in the upcoming mid-quarter policy review. However, the RBI is likely to reduce the CRR by 25 bps to ensure credit flow to productive sectors.
Rajeev Malik, Senior Economist, CLSA:
It's a positive surprise but bear in mind the jump is distorted by last year's low base, and this is going to reverse in November. The Diwali holidays were in October last year but in November this year. The real, credible assessment will be possible only after the November data. Overall, there is some stabilisation in activity. But the March quarter will show signs of a more convincing recovery.
The RBI should keep on hold next week but a CRR (cash reserve ratio) cut is possible. We maintain our expectation of a repo rate cut at the January meeting.
Shubhada Rao, Chief Economist, Yes Bank:
Clearly, the festive-related buoyancy has pushed this number. Overall, the seasonally adjusted month-on-month growth is 2.7 percent. However, stripping out the festive-related buoyancy, we continue to expect gradual pace of recovery in the overall economic activity.
A positive number on capital goods after seven months of consecutive contraction, is a good sign. In the months to come, we would watch for the 'crowding in' impact on the domestic investment cycle.
Today's number also corroborates Yes Bank's Demand Conditions Index, which showed two months of consecutive improvement in September and October, after six months of consecutive correction.
In terms of policy, we maintain our call of status quo in December policy. And, we expect the pecking order for the RBI policy action to be open market operations followed by a 25 bps cut in the cash reserve ratio in January and followed by a repo rate cut of 50 basis points in March.
Siddhartha Sanyal, India Economist, Barclays Capital:
This number was not entirely unexpected because it reflects the pre-festive season production month, which was not the same last year. Obviously you don't expect such numbers to be repeated month after month. This number is not a gamechanger.
But generally the trend in second half (October-March) will be slightly better than in the first half, though the overall growth momentum is still slow.
Rupa Rege Nitsure, Chief Economist, Bank of Baroda:
This was expected on account of two things. One was, the base effect and the core industrial output, primarily coal, and refined petro products had shown good buoyancy in the month of October.
But the number does not give confidence that growth momentum at this pace will be sustained, as capex concerns have not eased significantly.
The RBI will attach more weight to the headline inflation number and the core inflation component rather than getting influenced by today's IIP reading.
Amol Agrawal, Economist, STCI Primary Dealership:
The core sector numbers had indicated an upsurge in the index. But it has come in higher than expectations. The numbers are however on a lower base.
The RBI is unlikely to cut rates on December 18. However, with the repo bids coming down, a CRR cut is not definite.
G. Chokkalingam, Executive Director & Chief Investment Officer, Centrum Wealth Management:
One number should not be taken seriously; off late the monthly fluctuations are very high. Base effect is also there. This is not an indicator of turnaround.
Equities should be neutral to this as on one hand it spoils hopes for rate cut but smart people understand that it's just a base effect.
Industrial output grew at a better than expected rate of 8.2 per cent in October 2012. Low base and festive demand helped IIP to clock its fastest growth in about a year. At broad based level, barring mining and quarrying, growth across other sectors has been good. Even at the use based level, with the exception of basic goods, growth has been robust in other sectors during October 2012 with consumer durables clocking a growth of 16.5 per cent. However, it is too early to believe that this type of buoyancy will sustain going forward. As the current industrial slowdown is both well entrenched and broad based, it will take a while for industrial growth to recover. Therefore, we expect industrial output growth to remain at muted levels during the remaining months of this fiscal. The industrial contraction of the previous month has now been revised upwards to 0.7 per cent from 0.4 per cent reported earlier.
With inputs from Reuters