Higher IIP growth kindles economic revival hopes

NEW DELHI: India's industrial output rose more than analysts' estimates in August and retail inflation slipped moderately to single digit in September, raising hopes that the central bank may cut benchmark rates later this month, boosting investments and consumption.

The index of industrial production (IIP), which measures mine and factory outputs and power generation, increased 2.7% year-on-year in August, data released by the Central Statistics Office on Friday showed.

This reverses two months of contraction in industry production as the July numbers were revised to 0.2% fall from 0.1% rise estimated initially. The IIP growth also beat a Reuters poll forecast of 1.1% rise.

Retail inflation, as measured by the consumer price index, dropped slightly to 9.7% in September from 10% in August, the government said on Friday, though it may rise this month as the increase in diesel prices in mid-September completely reflects in retail prices.

Several experts believe the numbers are positive enough for the Reserve Bank of India to cut its bench mark lending rate at its monetary policy review on October 30 to complement the government's recent reforms measures to propel growth.

"Our expectation is that RBI will choose to reward the government with a 25 basis points cut in the repo rate," Mole Hau, researcher at BNP Paribas, said in a report. "However, the inflation outlook means RBI's space to ease policy much further remains limited."

The pick-up in industrial output in August was driven by manufacturing output-which 75.5% weight in the IIP-to a five month high of 2.9%, mainly powered by increased production of consumer goods ahead of the festival season. Production of consumer goods rose 5% in August from a year ago. Economists are divided over whether the IIP numbers indicate that the slowdown has bottomed out.





"This is a positive sign and might be indicative that the worst is over for the industrial production, even as there are limited hopes on any likelihood of a V-shaped recovery as of the post-Lehman phase," said Indranil Pan, chief economist at Kotak Mahindra Bank.

Sonal Verma of Nomura said industrial growth averaged 1.4% y-o-y in first two months of the July-September quarter, while in previous quarter it contracted by 0,2%. This suggests that industrial output growth is starting to recover, though it remains at a very low level, Verma said in a note. Some others are not so enthused, saying that the numbers could be dismal as shown by the steepest monthly fall in vehicle sales in nearly four years and falling exports.

Car sales skid by 5.36% in September, while the motorcycle segment dipped 18.85%. Exports dipped 11% in September, the fifth straight month of decline.

"August data should not be seen as hinting at a revival in demand conditions," Saugata Bhattacharya, chief economist at Axis Bank, said. DK Joshi, chief economist at ratings agency Crisil, too is not elated. "We are so used to negative growth rates that a meager 2.7% is being seen as a joyous number," he said. "Capital goods output is contracting, core sector is very weak and exports are down."