Factory output leaps 7.8% in June, signals revival

Industrial output growth rebounded to the fastest pace in 16 months in June. At 7.8%, the growth was a significant leap from 2.2% in the previous month. Policy advisors called it a \'sign of turnaround in the economy\' even though some analysts cautioned that such high growth may not be sustained in the coming months.

Nevertheless, the consensus is that the government\'s stimulus measures are taking hold and that the economy is fast heading towards a revival.

The uptick in consumption and investment demand is widely expected to continue, while the improved financial conditions are expected to mitigate the adverse effects of scanty rains and lower crop sowing on the economy.

The index of industrial production (IIP) has shown the highest growth since February 2008, when it rose 9.5%.

\"High growth in India\'s capital goods sector is a sign of turnaround in the economy and the positive trend in industrial output will continue,\" finance secretary Ashok Chawla said on Wednesday.

Chawla also said the government would decide later, if it needed to review its borrowing target for the current fiscal, as the target had been raised upwards by Rs 30,000 crore to Rs 4 lakh crore for 2009-10.

After three months of contraction, the capital goods index grew at 11.8% in June 2009. Electricity and manufacturing too grew at 8% and 7.3% respectively the highest rise after February 2008.

Mining expanded the most since June 1995 at 15.4% in June 2009. This was because the coal sector output grew annually by 15% in June, the biggest in over two years. Consumer durables grew at a healthy 15.5% with the consumer goods index, including durables and non-durables, rising by 4% in June.

The cumulative growth for April-June 2009 stood at 3.7% compared to the same period last year. The industrial growth rate for May 2009 was revised down to 2.2% from 2.7%.China\'s industrial output in July grew an annual 10.8%, its highest in nine months but below forecasts, indicating that emerging economies were leading the global economic recovery.

\"The upside from industrial activity is likely to mitigate the negative impact of poor rains. Financial conditions have continued to loosen over the summer, and this mitigates the negative impact from a contraction in the agricultural sector,\" Goldman Sachs said.

It revised it GDP growth target to 7.8% from 6.6% for 2010-11, while it kept the 2009-10 forecast unchanged at 5.8%.

Kotak Mahindra Bank (KOTAKBANK.NS : 746.9 -7.55) chief economist Indranil Pan said rural consumption may weaken from July onwards due to poor monsoon, but its impact on rural incomes could be contained by the job guarantee scheme.

\"Even the downside to the consumption demand in the rural segment due to the failure of agriculture would be limited by the National Rural Employment Guarantee. People who would not have farm jobs due to drought can easily earn their sustenance through the NREGA scheme,\" he said.

\"While the poor monsoon is creating justifiable concerns about agricultural sector output, Wednesday\'s release suggests there is plenty of momentum in the ex-agricultural sector,\" HSBC economist Robert Prior-Wandesforde wrote.

Dun and Bradstreet India head (economic analysis) Yashika Singh said the June growth data could be an aberration but the economy is certainly stabilising. The index has registered an increase of 9.5 percentage points (month-on-month) during June 2009 against an average decline of 5.6% percentage points m-o-m during the last three years and average decline of 2.4% since 1993-94.

\"Therefore, it may be premature to state that this is a sustained industrial bounce-back, and perhaps cautious optimism needs to be maintained when reading into these numbers. Nonetheless, growth in industrial production in recent months has shown signs of stability returning into the economy,\" Singh said.