Growth in Industrial production may encourage stimulus phase out

Industrial production growth slowed to 15.1 per cent year-on-year in February from 16.7 per cent in January. The slowdown was sharper than expected and was mainly attributable to slower growth in manufacturing and mining output.

India’s industrial production growth was 15.1 per cent year-on-year in February. Production growth has slowed since hitting a record-high 17.6 per cent in December. The Ministry of Statistics and Programme Implementation does not release seasonally adjusted data. Seasonally adjusted estimates suggest month-on-month growth was strong in late 2009, after a sharp jump in May and June.

Based on a sectoral breakdown, manufacturing production was up 16% y/y (decelerating from 17.9% in January), mining production grew 12.2% y/y (decelerating from 14.6% in January), and electricity production grew 6.7% (accelerating from 5.6% in January).

Based on a breakdown by product type, production of basic goods was up 8.4% y/y, production of capital goods was up 44.4%, production of intermediate goods was up 15.6%, production of consumer goods grew 8.9% (with consumer durables production up 29.9% and consumer nondurables production up 2.3%).

Industrial production continued to expand at a rapid year-on-year pace in February, though slowed for the second consecutive month. In recent months a low base effect has boosted year-on-year comparisons, as the reference month from 12 months earlier was the period between October 2008 and January 2009, when production was in freefall across Asia. Putting aside the base effect, since the middle of last year industrial production growth has surged, aided by fiscal stimulus, resurgent consumer demand, inventory adjustment and healthy external demand.

The breakdown showed strong growth in production of consumer durables and capital goods, as has been the case in recent months. One positive development was the improvement in production of non-durable goods, which grew on a year-ago basis after having contracted in January.

Falling agricultural output and high inflation have taken their toll on production of non-durable goods, which should receive a boost in coming months from favorable weather conditions. Electricity production growth remained far weaker than overall production growth, though this is reflective of supply constraints more so than a lack of demand for electricity.

The healthy performance of the industrial sector is likely to reassure policymakers that they can remove stimulus without disrupting the economy’s growth momentum. Based on capital goods production, investment looks set to grow strongly over coming quarters. The Reserve Bank of India is aware of this and has begun draining excess liquidity in the banking system by hiking deposit ratios and money market rates. Meanwhile, the government has made plans to cut the budget deficit.