Aided by favourable base, festive demand; analysts desist from pronouncing major turnaround in output
Industrial output growth sprang a pleasant surprise, scaling a five-year peak of 9.8% in October, aided by a favourable base and festive demand in the build-up to Diwali, showed the official data released on Friday. Policy-makers and analysts, however, desisted from pronouncing a major turn-around in economic output yet, with some economists even expecting a slowdown in industrial production growth in November when both the favourable base effect (The index of industrial production, or IIP, had contracted 2.7% in October last year) and festive demand wane.
Still, the fact that the IIP grew a modest 4.8% during the April-October period, compared with 2.2% a year before, prompted some to reckon a nascent recovery is underway. This is also corroborated by a 67% jump in the excise duty collection, which remains robust even after stripping off the additional revenue enhancing measures, including an increase in the duty rates.
Chief economic advisor Arvind Subramanian called for caution in interpreting the October data, as these have been boosted by Diwali demand. “It’s a good number and I hope this continues. But we should never read too much into month-to-month numbers,” he said.
The data also showed some bright spots. Consumer durables output rose 42.2% in October, the highest since December 2009, which helped drive up consumer goods output by 18.4% during the month, the sharpest increase since January 2010. At 4.7%, consumer non-durables growth too hit its highest since February this year. Even the usually volatile capital goods segment, a gauge for fixed corporate investment, has witnessed growth in 11 out of 12 months through October, suggesting enhanced government spending was starting to have an impact. The latest GDP data also showed gross fixed capital formation in the September quarter grew the 6.8%, the highest since the first quarter of 2014-15, aided by improved government spending.
However, a closer look pointed the huge role conducive base effects played in the IIP data, especially in durables.
Consumer durables had contracted 35.2% in October last year, dragging down overall consumer goods production by 18.2%. Since Diwali fell in November this year, and not October as was the case last year, the number of working days in October was higher this year. These factors prompted analysts to await data in the coming months for declaring a meaningful industrial recovery.
The IIP data also showed a marked contrast with the core sector sector, which makes up for 38% of the IIP. Core sector growth touched 3.2% in October, th same as September, although four of the eight sectors, including steel and crude oil, contracted. The government has revised up September IIP growth to 3.8% from 3.6% announced earlier.
“The latest spike in industrial growth is likely to be a short-lived statistical aberration. With a reversal of the base effect, we expect a substantial moderation in IIP growth in November, in line with the trend recorded by automobile production,” said Aditi Nayar, senior economist at ICRA.