Early Diwali gives growth a boost

If you needed further proof that things are looking up for the Indian economy, here it is. For the first time in two years, industrial output is up by a double-digit number. The index of industrial production (IIP) grew by 10.4% in August, 2009, as people bought more cars, TVs and other consumer durables, among other things.

The markets greeted the IIP numbers with whoops of joy. The Bombay Stock Exchange Sensex closed the day with a gain of 384 points, up 2.31% at 17,027.

What’s the fizz all about? Answer: early Diwali. Says DD Sharma, senior vice-president (research), Anand Rathi Securities: “As the festive season has come in early this year, dispatches of goods from factories had begun from August. Hence, the August numbers are skewed to that extent. Sales have been preponed.”

Shahina Mukadam, director at Varun Capital, adds: “Automobiles had good sales and some white goods have done well because of promotions. Both the stimulus package and the festive season have helped these numbers.” Automobiles, which have a 4% weight in the IIP, grew 21.9% to 11.58 lakh units in August.

Some manufacturers felt the uptick even earlier. Shantanu Das Gupta, vice-president (corporate affairs and strategy — Asia South) of Whirlpool, says he has been “noticing that consumer sentiment has been positive for the last four months.” Refrigerators and washing machines were doing very well and, with the festive season at hand, demand for microwaves had also increased.

Mukesh Ambani’s Reliance Industries, which is fighting a court battle over the pricing of gas to Anil Ambani’s Reliance Natural Resources Ltd, contributed to the IIP in August by bringing the Krishna-Godavari gas field into production. “The mining numbers were good as a result of the KG basin gas production,” says Mukadam of Varun Capital. Mining and quarrying has a weight of 10.47% in the IIP.

“The 10.4% rise in August IIP was the first double-digit increase in output since October, 2007, which compares well with a bottom of -0.2% growth in December, 2008,” says Robert Prior-Wandesforde, economist with HSBC. Sequential growth, that is the rise in August compared to July, was 2.3%. “This is India’s strongest increase since at least mid-1994,” adds Wandesforde.

Apart from the rise in automobiles and consumer durables, analysts see another factor behind the August boost: exports are not doing as badly as before.  “Two factors have driven this sharp revival. First, the revival in domestic credit is evidenced by the sharp pick-up in automobile volumes and fast-moving consumer goods. Second, there is a deceleration in the pace of decline of exports,” says Ashutosh Datar, an analyst with IIFL, the institutional equities arm of India Infoline.

But some economists warn that we shouldn’t read too much into the numbers. “This strong positive growth is (partly) due to the statistical impact of a low base,” says Rupa Rege Nitsure, chief economist, Bank of Baroda. What she means is that industrial growth in the same period last year was very low. On that low base, the growth this year looks high.

“Though the worst is behind us, it is too early to say that we are completely out of the woods. I am still not sure if this growth is coming from consumer goods, because while consumer durables are doing well, non-durables are still not showing a significant upward movement,” says Indranil Pan, chief economist, Kotak Mahindra Bank. Consumer durables are essentially goods like passenger cars, motorcycles, refrigerators, televisions, washing machines, etc. Non-durables are products of daily or frequent use, like toothpaste, soap, pencils, paper, leather goods, tea, coffee, and oil.

A double-digit IIP may not be sustainable in the months to come. Unlike August, says Shubhada Rao, chief economist, Yes Bank, the base of comparison may be higher for September, 2009. The heavy rains in August this year may have impacted production in September. “For industrial production to have a sustained growth in the coming months, there is need for exports to continue rising month-on-month in the remaining part of the current financial year to March,” she adds.

The government, however, is not one for pessimism. “It seems the trend is likely to stay. It is not a short-term spike. The confidence level seems to be returning,” says finance secretary Ashok Chawla.

But that could be another cause for worry. If industrial production sustains it growth rate, it could boost inflation. “While strong domestic demand may not immediately feed into inflation, it will start to impact inflation next year,” says A Prasanna, vice-president, ICICI Securities Primary Dealership Ltd.

This means interest rates could start rising. “With doubts over the durability of India’s upswing fading all the time, and with inflation pressures already high, policy rates look certain to move up soon,” says Kevin Grice, an economist at Capital Economics Ltd in London. “We still expect a first hike in January but the possibility of a first move at the October 27 monetary policy meeting now looks close to a 50:50 call.” Duvvuri Subbarao, governor of the Reserve Bank of India, said last week that India may need to act ahead of advanced economies on inflation due to “incipient” inflation pressures.

(With contributions from NW 18, Khyati Dharamsi and Shailaja Sharma)