NEW DELHI: Industrial growth rocketed to a five-year high in October, riding a festive season-led boom in purchases of consumer goods, providing evidence that the economy may finally be picking up pace, although part of the spurt is due to a favourable base effect.
As measured by the Index of Industrial Production (IIP), output surged 9.8 per cent in October, data released by the statistics office on Friday showed, the fastest since October 2010 and much higher than the upwardly revised 3.8 per cent in September and the expectation of around 7.5 per cent.
The high industrial growth marks a strong start to the third quarter after data released last month showed the economy expanded 7.4 per cent in the July-September period, an improvement over 7 per cent reported in the first quarter.
The numbers will provide some cheer to markets worried over the logjam in Parliament.
Crucial legislations such as the goods and services tax (GST) have been stalled in Parliament.
The government welcomed the rise in IIP but cautioned against reading too much into it. “It’s a high number, it’s a good number, it’s an encouraging number, but one has to be a little careful in interpreting all monthly numbers, especially this one, because there is Diwali effect in this one,” said chief economic advisor Arvind Subramanian.
This year Diwali was in November as opposed to October in 2014. That would have resulted in greater production in October this year.
The favourable base effect, negative growth of 2.7 per cent last October, also magnified this year’s number.
“Hope this continues but never should we read too much into month-to-month numbers,” Subramanian added.
Car sales rose 10.4 per cent in November, indicating some demand support in the coming months as well.
Experts concurred that the situation was not as good as the data showed, but things were certainly getting better.
“This growth has come on the back of a low base effect and increase in spending and production due to Diwali and it can’t be replicated going ahead because there is no major pickup in corporate sector activity,” said CARE Ratings chief economist Madan Sabnavis. “However, this is a sign of recovery and not really surprising.”
Following the strong growth, CARE has revised the full-year IIP growth guidance to 4-5 per cent from the earlier outlook of 3-4 per cent though it is still sticking to its GDP forecast of 7.5-7.6 per cent growth. Ratings agency Crisil is also sticking to its GDP forecast of 7.4 per cent for FY16 for now.
“No doubt there is an improvement in IIP but this kind of growth is not sustainable,” Crisil chief economist DK Joshi said.
October index of industrial production grew on the back of increased output in manufacturing and electricity sectors at 10.6 per cent and 9 per cent, respectively. Mining also did better at 4.7 per cent growth. Overall April-October growth rose to 4.8 per cent, compared with 2.2 per cent in the year-ago period.
The standout performance was that of consumer durables at 42.2 per cent expansion, highlighting strong urban demand. Consumer non-durables, which depends more on the rural economy, turned positive after many months of contraction.
Capital goods output was up 16.1 per cent, providing more evidence of a slight recovery in the investment cycle.
In terms of sectors, 17 out of the 22 industry groups in manufacturing showed positive growth. The rise in manufacturing output was led by furniture, office machinery and communication equipment.
Aditi Nayar, senior economist of ICRA, a ratings agency, doesn’t expect the trend to be sustained.
“The spike in industrial growth is likely to be a short-lived statistical aberration. With a reversal of the base effect, we expect a substantial moderation in IIP growth in November 2015,” she said.
Industry lobby group Federation of Indian Chambers of Commerce and Industry also pointed to the base effect while calling for more reforms.