Beating all expectations, India?s industrial production expanded at a record pace of 17.6% in April, with the spectacular 73% growth in capital goods output prompting analysts to re-confirm an incipient investment boom. While all eight economists polled by FE after the data release expected the record pace of industrial output growth to continue for at least two more months, they were evenly divided on whether accelerated growth would trigger an immediate rate hike by the central bank.
Commenting on Friday?s data, finance minister Pranab Mukherjee said: ?My appetite for growth is infinite. I would have been happier if it was 20%.?
What is also reassuring about the data?based on the index of industrial production (IIP)?is that manufacturing, which has maximum weightage of over 79% in the index, grew at a scorching pace of 19.4% in April over the same month a year ago when it grew just 0.4%. The sector grew at 14.7% in March 2010. However, factory output in April contracted 8.9% over the previous month, while overall industrial output shrank 9.1%.
?Looking at indicators like purchasing managers? index (PMI) for May, my sense is that industrial production will remain high in coming months too,? said Jehangir Aziz, chief economist at JPMorgan Chase. PMI hit a two-year high of 59 in May on the back of new orders and high output. The record growth of 72.8% in the capital goods segment is ?an extremely good sign? as far as the investment cycle is concerned, Aziz said.
?The sharp growth in capital goods output shows that the corporate sector is upbeat and that all projects shelved due to the global crisis are back on stream,? said Suresh Tendulkar, former chairman of prime minister?s economic council.
Of course, a low-base effect is partly behind the impressive figures. Chief statistician Pronab Sen said that this would wear off from June, allowing IIP numbers to give a clearer picture of the strength of the recovery.
Indian economy, which was reeling under the impact of global economic slowdown started showing signs of recovery from June 2009, as an expansionary monetary and fiscal policy boosted domestic demand.?While inflationary tendencies need to be tackled cautiously, April IIP figures do not make the case for a hike in the policy rates,? Sen added. Sen expects headline inflation to ease in coming months.
High headline inflation numbers for May may increase pressure on the Reserve Bank of India to hike interest rates, as some economists and global think-tanks have cautioned that the central bank is already behind the curve.?After Monday’s headline inflation data, the central bank is likely to go for a hike in interest rates before the quarterly monetary policy review in July,? Aziz added. Headline inflation based on wholesale price index for month of April was 9.59%.
On June 7, RBI deputy governor Subir Gokarn had said that aggressive actions for monetary policy normalisation ?run the risk of needing either a stop-go kind of approach or in the worst case, a reversal, which is something we want to avoid.? Planning Commission deputy chairman Montek Singh Ahluwalia also maintained that high IIP numbers do not make the case for quickening the pace towards normalisation of monetary policy.
Yields on the benchmark government paper were little moved after the release of IIP data, with the debt market still awaiting Monday’s headline inflation data, before factoring in any hike in policy rates.