October industrial growth hits 5-year high but not time yet to celebrate
The factory output numbers for October has come at five year-high, but it is too risky to begin celebrations yet.
This spike is more on account of a seasonal jump in manufacturing, especially consumer durables during the festival season and it may be difficult to hold in November since base effect can very well play spoil sport.
The index of industrial production (IIP) grew 9.8 percent in October compared with a growth of 3.8 percent in the preceding month. The manufacturing segment grew by 10.6 percent in October compared with 2.9 percent in September, while the consumer durables grew 42.2 percent compared with a growth of 8.4 percent in the month before.
Similarly, consumer goods grew 18.4 percent as compared with 1.2 percent on month. The growth in the capital goods segment – a pointer of the investment activity in the economy – at 16.1 percent (as against 10.3 percent in the preceding month) is an encouraging sign. These are the areas that have contributed to the five-year spike in the factory output.
Now, the other side of this story, as mentioned earlier is that the November numbers may come much lower. It is too risky to look at one-month IIP number and derive comfort on a larger trend. There are reasons to believe that the October rally might not sustain in November:
For one, the base effect will play a big role in November. Last year, from November onwards there has been a sharp jump in the index, which will weigh on the figures this year. If the base is high last year, the numbers for the corresponding period this year will show a lower figure. Hence, it is highly difficult to assume an October-like growth will be sustained.
Secondly, the festival season impact too will not be consistent as we have seen in the previous years. Post the spike, sales tend to drag for the next few months and, as YES Bank economist Shubadha Rao pointed out, there will be an inventory drawdown. This why economists would prefer to call the October figure a statistical aberration, which might not last.
Having said this, the factory output numbers are indeed a big psychological booster to the government, evident from the comments of chief economic advisor Arvind Subramanian. “It is a high number, good number and encouraging number,” Subramanian was quoted in the Business Standard. But he too has cautioned about the seasonal impact.
The more crucial numbers to watch out for the is the consumer price index (CPI) inflation numbers set to be released early next week. The CPI has been inching up in the recent months rising to 5 percent in October. The retail inflation continued to inch up, rising to 5 percent in October from 4.41 percent in September and 3.74 percent in the month before, mainly on account of price pressures on food items such as pulses.
The central bank has noted the jump in food inflation but sounded confident of achieving its January target of less than 6 percent, when it announced the bi-monthly policy early this month. The central bank’s battle on inflation has been largely aided by lower crude oil prices but a failed monsoon has heightened the risks of resurgence in inflation in the approaching months. This will be among the factors the central bank will watch out before its next policy review in February.
One needs to wait and watch for the larger trend in IIP-figures to see whether growth-recovery has taken firm hold in the economy. The October-numbers offers a promising picture that needs to be seen with a bit of caution.
Read full article: First Post
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