Industrial production growth scaled a three-month peak of 5% in February, beating analysts’ expectations of a slowdown for a third straight month, as manufacturing recorded its best performance since May 2014 and consumer goods output hit its loftiest in 27 months.
Although favourable bases helped the expansion of both manufacturing and the overall Index of Industrial Production (IIP) in February (the latter had contracted 2% a year earlier), the latest data, however, are in contrast with a slowdown of the core sector growth to a 17-month trough of 1.4% in February. The core sectors make up for roughly 40% of the IIP.
The Central Statistics Organisation on Friday also revised IIP growth upward to 5.2% from 3.8% for November and 2.8% for January from 2.6% announced earlier. For the April-February period, industrial output grew 2.2%, compared with a contraction of 0.7% a year before.
The recent uptick in the IIP, including the upward revisions for November and January, also signals that while the efficiency of the corporate sector has been assumed to be improving — as reflected in the projected economic growth rate of 7.4% for 2014-15 under a new GDP series — industrial output seems to be improving only gradually.
With retail inflation staying below 6% since September, the latest data also give the Reserve Bank of India more leeway to hold rates and nudge more banks to cut their lending rates in sync with the lowering of the repo rate by it. State Bank of India, ICICI Bank and HDFC Bank have announced a cut of up to 25 basis points in their lending rates this month, after the RBI held the repo rate, expecting banks to give banks more time to reflect its previous cuts in their lending rates.
What came as a pleasant surprise is that after witnessing contraction in eight of the first 10 months of this fiscal, consumer goods grew 5.2% in February, rebounding sharply on the back of a 10.7% expansion in non-durables.
Manufacturing, too, grew 5.2% in February, compared with a revised 3.4% for the previous month and mining expansion hit 2.5% after two straight months of contraction. Power generation, too, grew its highest since November, at 5.9%.
Moreover, according to the HSBC survey, manufacturing activity in March grew at the fastest pace in four months, driven by a pick-up in output and fresh orders. However, risks to the economy still remain.
“The double-digit growth of consumer non-durables benefited from a significant expansion in output of apparels and leather garments in February, somewhat at odds with the subdued trend recorded for exports in the same month,” said ICRA senior economist Aditi Nayar. While the textile segment exceeded its performance in previous months to grow 5.1% in February, apparels saw a whopping 62% expansion during the month.
Although notorious for volatility, capital goods output — a proxy for fixed corporate investment — witnessed a slowdown in growth to 8.8% in February from 12.5% in the previous month. While the Consumer Confidence Survey by the RBI, based on respondents in six cities, suggested urban consumption demand may pick up in the near term, with the rabi harvest damaged by unseasonal showers, rural demand is expected to remain subdued, which is in line with the weak growth in two-wheeler sales in the last quarter of 2014-15.
While fluctuation is inherent in the way capital goods output growth is measured, analysts chose to wait for sustainable and healthy growth in consumer goods output before pronouncing a broad-based demand recovery.
However, CII president Sumit Mazumdar said: “Going forward, the flurry of reform initiatives taken by the government, which has been duly supported by the monetary easing stance of the RBI and the decision of the banks to transmit the rate cut across sectors, would bring the investment momentum back to the economy.”