Encouraged by a robust 16.7% growth in industrial output in January, finance minister Pranab Mukherjee on Friday said the economy seemed to be ?on the path of fast recovery.?
The growth in the index of industrial production was driven by a record 56.2% expansion in capital goods output, while manufacturing in general and mining showed high growth. The steep hike in production of capital goods signals the much-needed recovery in private investment, analysts said, commenting on the data released by the CSO.
This is the fourth consecutive month the IIP grew at double-digit rates. The index grew at 17.6% in December. Mukherjee said: ?For the two consecutive months, there has been high growth. Perhaps, it indicates that the manufacturing sector is going to make substantial contribution to growth.?
Analysts expect growth to taper off from May onwards as low base effect of the last year disappears and higher interest rates are likely to kick in from April, when the Reserve Bank of India reviews its monetary policy. HSBC expects RBI to hike policy rates by 200 basis points in a gradual manner over the next 12-15 months.
The industrial expansion in January, a month before the government partially rolled back fiscal stimulus, came due to a 17.9% growth in the manufacturing sector, which has 80% weight on the IIP. Within manufacturing, capital goods surged the most. The consumer durables segment zoomed 31.6% in January against 2.1% a year ago. Electricity generation expanded at 5.6%, up from 1.8%.
?As a conservative person I would like to wait for one more month figure. But the signal is quite clear and it is encouraging?, Mukherjee said.
IIP contributes more than a quarter to the gross domestic product, which grew at 6% in the third quarter. The economy can grow above 8.5% in the fourth quarter, said Kaushik Basu, chief economic adviser in the finance ministry. This would help India attain a target growth of 7.2% in 2009-10.
The BSE Sensex ended down 0.01% at 17,166.62 points on Friday, while yield on the 10-year benchmark government bond ended up two basis points at 8.01% on Friday. Planning Commission deputy chairman Montek Singh Ahluwalia said in Mumbai on Friday the economy has weathered an ?extraordinary crisis? and 9% GDP growth is possible in 2011-12.
From October 2008 to May 2009, overall IIP growth had averaged at only 0.8% and a bounce in the industrial production in the recent months was thus anyway anticipated, as it came on a low base growth, said Kotak Mahindra Bank chief economist Indranil Pan. During April-January 2009-10, the industrial output grew by 9.6% compared with 3.3% during the same period last fiscal.
?As per our estimates, IIP could grow at 15%-plus for the rest of this fiscal and almost till May-June 2010. After this, we expect IIP growth to fall off to around 10-12% in the six months hence (till around Nov/Dec). This slowdown will also probably be on account of RBI increasing the policy interest rate,? Pan said. The central bank is expected to raise policy rates in April to tame inflation that rose to 8.56% in January, and to rollback expansionary policy put in place to battle the economic crisis. The policy authorities need to act much more aggressively than they have so far to clamp down on underlying inflation, HSBC?s senior Asian economist Robert Prior-Wandesforde said in a note.
But the anticipated decline in inflation and the pressure to be accommodative of the government?s borrowing plans will probably continue to limit the extent and speed of RBI rate rises to some extent, HSBC said. CII director general Chandrajit Banerjee, however, said any increase in policy rates will hurt the industrial recovery, especially in the SME sector.