Industrial output growth maintains momentum

The Index of Industrial Production (IIP) grew at 15.1% year-on-year (y-o-y) in February, lower than expectations, but held on to the pace of growth momentum. The number comes in against a growth of approximately 16.7% y-o-y in the previous month and a mere 0.2% y-o-y growth a year ago.Growth in February pulls up the April-February FY10 growth to a robust 10.1% y-o-y against approximately 3% in FY09. Depicting the usual seasonal trend, the index fell approximately 4.2% sequentially in February.However, on sequential seasonally adjusted basis, IIP posted a small fall of around 0.3% after having expanded by a monthly average of approximately 1% during August-January. Lead indicators, including Purchasing Managers’ Index, intermediate goods production and commercial vehicles production, have been strengthening in recent months.The strong double digit growth has, to a great extent, been a derivative of a low base. However, much of this low base effect is expected to wear off June onwards and the headline number is, therefore, likely to post somewhat moderate figures, although basic momentum in IIP is set to continue. On balance, we expect y-o-y IIP growth to be in the range of 14-16% for the next three months.The Union Budget was largely growth-friendly, while keeping a steady focus on fiscal consolidation. It resorted to gradual and selective rollback of stimulus measures—excise and customs duties were increased only partially, while the service tax rate was kept unchanged. Overall, the government did not resort to any severe fiscal policy contractions, keeping a steady eye on supporting broad-based growth recovery.On the monetary policy front, with the headline inflation almost in double-digits and non-food inflation gradually moving up, the Reserve Bank of India is turning more cautious. With the current policy rates being far lower than their “steady state” levels, further hikes in policy rates is a certainty. However, such hikes will definitely be gradual—the central bank will refrain from a hasty move based on point–to-point data release.As per use-based classification, capital goods production for February remained high y-o-y (albeit on a low base). Since September, growth in this index has been incessantly high, especially during the last three months, largely indicating a pick-up investment activity in the economy.Consumer durables’ production, which is largely driven by discretionary demand, has been posting high growth in FY10 so far, most of which can be attributed to increased stimulus on account of reduction in customs and excise duties and improved consumer confidence. Accordingly, anticipating an increase in these duties in the Budget, demand in this sector accelerated in the past four months. On the other hand, consumer non-durables’ production remained slack as a result of poor agricultural output and high inflation.During February, growth in intermediate goods’ production was lower than the preceding few months. This segment, which maps the shape of a production cycle, typically tends to exhibit a two-three-month lead period over the overall IIP.As per classification by economic activity, the manufacturing sector continued to post robust growth, followed by mining and electricity production. During the economic slowdown, manufacturing and mining activities had been at the helm of the downturn. During FY10 so far, recovery is being led by a remarkable pick-up in manufacturing (approximately 11% y-o-y) and mining (approximately 10% y-o-y), followed by electricity (approximately 6% y-o-y).Manufacturing, with a weightage of around 80% in the index, grew around 16% in February. However, the growth outlook is of caution on grounds of existing high excess capacities in some countries, rising costs of sustained fiscal stimulus, and the possible impact of withdrawal of policy stimulus.