Saturday, December 15, 2007

My comment in Economic times


IIP grows at 11.8% in Oct on festive demand
15 Dec, 2007, 0058 hrs IST,Pallavi Mulay, TNN

The index of industrial production (IIP) grew at 11.8% in October 2007. Driven by a 13.3% manufacturing growth, this is the fastest in the past six months. A robust festive demand has been the key factor. This is evident from a 12.5% increase in consumer goods on account of strong growth in durables as well as non-durables.
Capital goods and intermediate goods are other sectors that recorded an accelerated growth at 20.5% and 14.2%, respectively. However, production of basic goods slipped to 6.2% this month. Overall industrial performance is satisfactory in October 2007.
Such a spectacular growth was obvious for two reasons: pre-Diwali buying buoyed demand while a low growth of 4.5% in October 2006 improved the present number. Whether this can be sustained is another point.
ABN Amro’s purchase manufacturing index, which is an indicator of manufacturing activity, has slowed down to 60.9 in November 2007 from the highest level of 61.7 attained in October 2007. Nevertheless, the survey has signaled an improvement in operating conditions in the Indian manufacturing sector this month. The order book is estimated to be healthy. However, mounting input cost is a concern. So far, manufactures have managed to hold on to their margins as they were able to hike output prices, says the survey.
Going forward, the Reserve Bank’s policy stance will be a deciding factor. Inflation numbers may go up in the coming weeks, thanks to base effect and a possible hike in fuel price. In addition, demand factors are expected to be benign. Capital flows following rate cuts may build inflationary expectations and leave RBI with little room to cut rates.
India Inc, on the other hand, is expecting a rate cut. Rate hikes and liquidity tightening in recent times may have affected the overall industrial growth, which has marginally dipped to 9.7% during April-October 2007 as against 10.7% in the year-ago period. Under the circumstances, if RBI holds interest rates and goes for a further hike in the cash reserve ratio, industrial growth may be adversely affected.
Anjali R,Pune,says:The numbers are encouraging!! But are they sustainable? Looking at the tight monetary policy, high interest rates and thereby suffering manufacturing sector, appreciating rupee which is discouraging exports especially from employment-intensive sectors and high base effect in index of industrial production may play a spoil sport in coming months. India's blistering economic growth slowed to 8.9% in the second quarter to September 2007, from a year earlier, hit by a downturn in manufacturing as higher interest rates and a strong rupee dragged on manufacturing and exports.
Though exports battled a rising rupee and an impending US slowdown to grow a healthy 35.65% in October 2007 to a seven-month high of $13.3 billion against the $9.8 billion recorded a year ago, the low base effect cannot be ignored. The exports registered a sequential slowdown from $10.7 million in September 2006 (growth of 47.06%) to $9.8 million in October 2006, clocking an annual growth of 21%. However, the October figures failed to cheer the economy fully, as exports from employment-intensive sectors like textiles, handicrafts and marine products had dipped significantly and exports would still fall way short of the target of $160 billion for the current financial year.
The rupee which has appreciated to 39.36 a dollar on 12 December 2007 from 39.56 a dollar on 3 December 2007 on back of capital inflows, will affect the exports growth. A close watch on inflation is necessary. The country's inflation is driven largely by spurt in agri commodity prices. With the global commodity prices on up heal and poor expected wheat crop in rabi season domestically, coupled with recent rise in global crude oil prices could un bottle the inflation genie. 15 Dec 2007, 1243 hrs IST


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