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Economy: Mixed signals - Views on News from Equitymaster
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  • Feb 19, 2003

    Economy: Mixed signals

    Thanks to the strong growth in agricultural output in FY02, industrial output for 9mFY03 has shown a stronger growth as compared to the corresponding period previous year. This is due to the fact that higher agricultural output in one year translates into actual demand with a lag effect. Also, adding to the buoyancy is the government spending on infrastructure. The industrial growth in FY02 was a weak 2.9%. One of the reasons contributing could be the decline in agricultural output in FY01.

    The positive impact of the growth in agricultural output was visible from the surge in IIP number for the month of July 2002. The numbers for the subsequent months continued to come in strong. The strong growth in IIP numbers (from July to October) has been largely due to the robust performance of the manufacturing sector. However, for the month of November there was a significant dip in the growth rates.

    The possible reason for this significant dip seems that the industry was already beginning to feel the impact of a lower than normal monsoon, which resulted in a drought like situation in 14 states. According to CMIE, agricultural production is expected to decline by 10% for FY03 and the decline in agricultural output is estimated to be 4%.

    Growth Mining Manufacturing Electricity General
      FY02 FY03 FY02 FY03 FY02 FY03 FY02 FY03
    Apr 1.6% 3.6% 2.7% 4.0% 1.5% 5.2% 2.5% 4.1%
    May -1.9% 8.3% 1.8% 4.0% 3.0% 2.2% 1.6% 4.1%
    Jun -4.3% 9.2% 3.4% 4.2% 2.1% 3.8% 2.6% 4.5%
    Jul -3.5% 12.5% 2.9% 6.7% 4.7% 6.1% 2.5% 7.1%
    Aug -0.3% 5.7% 3.3% 6.5% 2.7% 4.1% 2.9% 6.2%
    Sep 3.2% 1.0% 1.4% 7.6% 4.6% -0.4% 1.9% 6.2%
    Oct 2.4% 3.8% 3.5% 6.9% -0.2% 7.1% 3.0% 6.7%
    Nov 2.3% 3.4% 2.3% 3.8% 2.4% 3.5% 2.3% 3.7%
    Dec 0.5% 4.6% 3.0% 5.3% 4.2% 2.5% 2.9% 5.0%
    Apr-Dec 0.9% 5.6% 2.7% 5.4% 2.8% 3.8% 2.5% 5.3%

    However, the quick estimates for the month of December released by the CSO (central statistics organisation) are pleasantly surprising. The IIP (general) for the month of December has shown a growth of 5%, as compared to a 3.7% for the month of November. Again a strong performance from the manufacturing sector was largely responsible for this bounce back. The IIP for manufacturing sector grew by 5.3% in December as compared to a 3.8% growth in the previous month.

    CMIE had indicated of a decline in production of commercial vehicles and two-wheelers for the month of December. The only major industry to witness an improvement in demand was the cement sector. Thus, the quick estimates, especially for the manufacturing sector could see a significant downward revision going forward.

    The user-based IIP for basic goods has recorded a growth of 4.5% for 9mFY03 as compared to growth of 2.2% in same period last year. This points to an improving scenario. The IIP for capital goods also paints an optimistic picture. The IIP for 9mFY03 grew by a steep 10.3% as compared to a decline of 4.8% for the corresponding period last year. The growth for basic and capital goods is likely to have emanated from the housing and road construction segment. A softer interest rate environment has seen a steep growth in demand for housing loans. Further, the government's aggressive spending on road construction has buoyed demand.

    Going forward, a large number of factors acting in tandem could boost investment. Firstly, the central bank has adopted a soft interest rate policy. This has theoretically made capital available at a much lower cost to the industry. Further, government's focus on infrastructure spending is also a big positive. Improved infrastructure is likely to improve investment outlook. Also, a recovery in the industry is likely to bring in the accelerator affect. But drought like situation in 14 states, which will adversely impact the Kharif crop, could be a dampener for the industrial recovery in the short term.



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