Industrial production claws out of red

Industrial production claws out of red
The Financial Express, June 13, 2009, Page 1

fe Bureau, New Delhi

Industrial production grew by a more-than-expected 1.4% in April, reversing the contraction in three of the previous four months and fanning expectations of a quick turnaround by the economy. Policy advisors said the worst was over, but there is need to push banking, pension and insurance reform to enhance credit availability to the corporate sector, as this would be crucial to sustain investment-led growth.

Analysts said the uptick would put an end to RBI’s rate-cutting cycle, though some believe a last 25-basis point cut in its short-term lending rate could be a possibility during a monetary policy review slated for next month. Stock markets largely ignored the positive data, with the 30-share BSE Sensex ending down 1.13% at 15,237.94 points, as investors booked profits ahead of the weekend after a more than 90% rally since early March.

China’s industrial output also rebounded in May, alongside stronger expansion in credit and consumer spending, adding to hopes it could lead a global revival. India’s manufacturing output, accounting for about 80% of the index of industrial production, grew at 0.7% in April, compared with a 1.6% contraction in the previous month.

“There are signs of recovery. The worst is over. Industrial production is rising,” said Suresh D Tendulkar, former chairman of the Prime Minister’s Economic Advisory Council. “The 9% growth in the last four years was made possible through the corporate sector,” which is facing a scarcity of term lending at present, Tendulkar said. This gap can be closed through banking, insurance and pension reforms, he added.

Most of April’s rise in industrial production came from the electricity segment, which grew by 7.1%, the best since February 2008. Mining grew 3.8%, the best since September 2008. The intermediate goods industry revived sharply by 7.1%, its highest growth in over a year, while the basic goods industry grew by 4.6% in April, more than the previous month’s 2.1%. Capital and consumer goods, however, contracted by 1.3% and 4.7%, respectively.

Within the consumer goods segment, durables (with a 19% weight) grew by 16.9%, while non-durables (81% weight) contracted by 10%. The durables growth could be due to the positive effects of the government’s economic stimuli, while the fall in non-durables could be attributed to a negative 34.4% growth in food products, Axis Bank said.

“The capital goods industry growth is likely to remain weak through 2009-10, which would be reflected in lower gross fixed capital formation number for the current fiscal,” a Kotak Mahindra Bank note said.

“Financial conditions have eased considerably. The economy continues to have significant pent-up demand for investment, especially in infrastructure and affordable housing,” Goldman Sachs said.