Manufacturing, with a weight of 80% in IIP, contracted by 3.3% in March from the same month the previous year-the sharpest fall since April 1995. Equally worrying was the surprising 8.2% fall in the output of capital goods-an important indicator of investment-the poorest performance since June 2001, when it fell by 9.8%. In February, the sector grew a robust 11.7%.
After the release of the factory output data, the BSE and NSE marginally erased their days otherwise impressive gains. Indranil Pan and Kaushik Das of Kotak Mahindra Bank noted in a report, Weak capital goods production was instrumental in pulling down overall manufacturing sector growth.
However, analysts are still optimistic that output will pick up in April. The large contraction in March industrial production can partly be explained by a high base, especially in the capital goods sector, according to analysis by Tushar Poddar and Pranjul Bhandari of Goldman Sachs. Capital goods grew 20.3% in March 2008.
Thanks to resilient domestic demand, consumer durables recorded 8.3% growth in March 2009, up from a 2% contraction a year earlier, probably on account of RBIs aggressive easing of monetary policy since October 2008 and also the fiscal stimulus packages that added to the net disposable incomes of households, the Kotak Mahindra Bank report said, adding: We expect this buoyancy in the durable consumer goods segment to continue due to the lagged impact of the monetary and fiscal policies.
Another important factor contributing to the contraction of factory output was poor external demand, which resulted in March exports slumping by 33.3%, the worst since April 1995. As many as 12 of the 17 industry groups recorded negative growth, including food products (-35.8%). This sharp contraction resulted in non-durable consumer goods output shrinking for the second consecutive month to 3.6% in March. This, in turn, led to a 0.8% contraction in the growth of the consumer goods sector.
Factory output for the whole of 2008-09 registered a sharp deceleration to 2.4% from 8.5% the previous fiscal. Prime Ministers economic advisory council chairman Suresh Tendulkar said: Recovery is bound to be slow but (the economy) is picking up. International financial markets are stabilising and are also picking up. Steel, cement and other sectors are reviving. I expect that impact of stimulus measures will come.
Pointing out that IIP is prone to revision in subsequent months and that the February figure was scaled up to a 0.7% y-o-y decline from a 1.2% decline, Goldman Sachs said it expects the March figures to also similarly improve.
Referring to the Purchasing Managers Index (PMI) for April that showed its first expansion after contracting for five successive months, the Goldman Sachs report stated: Looking forward, we expect an uptick in the April IIP. The excess liquidity in the system, a substantial easing of financial conditions and decline in some key interest rate spreads suggest to us that activity will pick up in H2 FY10.
The April ABN Amro PMI for India increased to 53.3 compared with 49.5 in March, and was the best since last October. This is the first time since November that the ABN Amro PMI has moved into expansionary territory (the threshold level of 50 signals economic activity is growing).
Other reasons for optimism is the pick-up in motor vehicle sales in the last three months and the increase registered by railway freight. Passenger car sales rose 4.2% in April from a year earlier, following a 1% gain in March. Cement production also increased by 10.1% in March. Goldman Sachs said Indias GDP is likely to grow 5.8% y-o-y in FY10, lower than the expected 6.4% in FY09, but higher than the consensus estimate of 5.1%.