As India?s factory output shrunk for the second successive month?the first time in 16 years?industry said the figures were still better than expected and that industrial production could end this financial year growing 3% overall. The monthly index of industrial production (IIP) contracted by 0.5% in January, compared with a growth of 6.2% a year earlier, according to CSO data released on Thursday.
Companies are hopeful that the production of consumer durables, which reversed three months of consecutive contraction to grow 2.5%, is a sign that additional government spending is reviving demand. The figures beat market expectations. The BSE Sensex ended up 183.35 points, a 2.25% rise over Monday (the last trading day) to close at 8,343.75.
Despite the optimism, the latest figures mean the economy?s overall growth rate will have to be clipped from the 7.1% estimated at the beginning of February. Industrial output accounts for a fifth of GDP, whose growth fell to 5.3% in Q3, the lowest in any quarter in five years. ?We will have to wait until the latter half of 2009-10 to see a meaningful recovery,? said Nomura economist Sonal Varma, who projects only 6.4% growth this fiascal.
Signs of the economy cooling off are visible in the latest weekly inflation data, also released on Thursday. The rate of inflation, as measured by the wholesale price index, dipped to a seven-year low of 2.43% for the week ended February 28.
Industrial output for the April-January period this year now stands at 3%, against 8.7% in the corresponding period of last fiscal. Since IIP had spiked between February and April, 2008, it is quite likely that factory output for the rest of this fiscal would not improve much, despite the welcome surge in consumer spending.
Along with consumer durables, capital goods grew well at 15.4%, indicating an improvement in domestic demand and production. Growth in the output of machinery & equipment other than transport rose by 17.5%.
Meanwhile, the government has revised IIP data for December to show a contraction of just 0.6%, instead of the initial estimates of?2.6%, giving hope for a slightly better figure in January, too, when it is revised. Industrial output had contracted for the first time in 13 years in October 2008 to -0.4%.
?The December quarter was a nightmare. Sectors like chemicals and refinery had to sell finished goods at lower prices than their raw materials, which were high due to high oil prices. We have seen contraction in exports too since October 2008. But February and March numbers would be more decent. Sectors like autos, chemicals, consumer durables and steel are picking up,? said PM?s Economic Advisory Council member Saumitra Choudhuri.
Though the Reserve Bank of India has eased benchmark lending rates by 400 basis points since October 2008 and the Centre has announced three stimulus packages in as many months, the full impact of these fiscal and monetary measures will only be felt by the end of the first half of 2009-10, analysts point out.