beyondbrics

Another sign of the strength of the Indian economy’s performance this year comes today in the form of industrial production figures for April, which showed a 17.6 per cent year-on-year increase, bigger than the 13 per cent or so predicted by economists.

Even if the rate slows in the coming months because of base effects, the country remains on track to record Gross Domestic Product growth this year in excess of 8 per cent – welcome news for the slugish global economy. While the authorities are keeping a close eye open for signs of over-heating, the latest numbers are unlikely to push the central bank into any precipitous action. Markets responded calmly to the numbers, with the Sensex index closing 0.7 per cent higher.

The increase was driven by a particularly big jumps in output of capitla goods of 72 per cent and in consmer durables of 37 per cent, showing that companies and consumers alike are ready to spend on big-ticket items.

The Reserve Bank of India, which has raised interest rates by 50 basis points since March, is expected to continue with further steady tightening.

Rahul Bahoria, of Barclays Capital, told beyondbircs that he expected increases of a further 100 basis points by the year-end. The main point in the April industrial production numbers, he says, is the fact that the economy continues to grow strongly:

The numbers were a surprise on the upside. We expect 8 per cent GDP growth for the fiscal year (ending March 2011) and the risks are on the upside. The RBI is considering interest rate actions because of its concerns about inflation. But the pace depends on the global economy.

Anubhuti Sahay, of Standard Charterd Bank, Mumbai, told Reuters:

Extremely strong number and even on a seasonally-adjusted basis it shows that activity improved over March. With a 72 percent kind of rebound in capital goods and consumer goods also picking up strongly, economic activity looks pretty robust. Focus would now shift to the release of inflation data on Monday and we expect it at 9.70 percent. Hence, we expect the RBI to stick to its normlisation policy and raise 25 bps each in repo and reverse repo rate in its July
policy meeting.

As always in India, the great unknown is the monsoon, which has just started its journey across India. It afffects industrial production somewhat less than some other economic indicators but can have a dramatic effect on others, above all food price inflation. As Bahoria says: It’s too early to predict. but the monsoon is always a big risk factor.”