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Factories throw up a surprise

New Delhi, Dec. 12: A surge in manufacturing output pushed industrial production to a 16-month high of 8.2 per cent in October, raising hopes of a turnaround in the economy.

Economists, however, advised caution as the high growth was the outcome of a low base effect and strong festive demand.

“I am very encouraged by the indications of the green shoots in the economy in terms of production. IIP figures are very encouraging,” finance minister P. Chidambaram told reporters. The index of industrial production (IIP) had contracted 0.7 per cent in September.

However, Chidambaram added, “One swallow doesn’t make a summer. There are signs of green shoots. Let us be happy about the moment. But let us see how we go forward in the next four months. Investments are taking place, capacity is being created and consumption is happening in consumer durables and non-durables.”

The UPA government in the past three months has taken steps to enhance foreign investments and stepped up efforts to reduce budget deficit to reinvigorate an economy beset by faltering domestic spending and exports.

It plans to announce measures to boost merchandise exports this week after shipments fell for the seventh month in November. The RBI has also signalled it may reduce interest rates next quarter if inflation eases.

Industrial output growth in the April-October period this fiscal, however, was 1.2 per cent, less than 3.6 per cent in the same period in 2011-12. So far this fiscal, IIP had shown positive growth only in May at 2.5 per cent and August at 2.3 per cent.

“The robust growth was owing to a combination of a favourable base and sequential ramp-up in festivity related production…The sharp uptick in October production is unlikely to be replicated in the coming months. For the remaining months of the fiscal, we expect IIP growth to remain subdued,” Yes Bank said in its research report.

The manufacturing sector, which constitutes over 75 per cent of the index, grew a robust 9.6 per cent in October against a contraction of 6 per cent in the same month last year. However, the output of this key sector remained low at 1 per cent in the April-October period of this fiscal against 3.8 per cent growth in the same period in 2011-12.

Factory output had contracted 5 per cent in October last year. The IIP had expanded 9.5 per cent in June 2011.

In spite of a low base of last year, mining and quarrying contracted 0.1 per cent. Electricity output grew 5.5 per cent. The consumer durables and non-durables sector grew 16.5 and 10.1 per cent, respectively, resulting in an overall growth of 13.2 per cent for the consumer goods sector in October.

C. Rangarajan, head of the PM’s economic panel, said the October IIP number was much higher than what was expected. There was a need for industrial growth of about 8-9 per cent in the second half of 2012-13 to keep the economic growth at around 6 per cent this fiscal.

He said the Reserve Bank of India would be “more focused” on wholesale inflation data before deciding on interest rates.

Making a case for spurring economic growth, CII director general Chandrajit Banerjee said RBI should start “reducing interest rates in January 2013, since India is currently maintaining the highest interest rate regime anywhere in the world.”

However, Bhupali Gursale, economist with Angel Broking, said “we do not expect RBI to ease rates until the fourth quarter particularly since inflation remains sticky and above its comfort level”.

The gross domestic product expanded 5.3 per cent in the second quarter of this financial year.

 
 
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