Chewing tobacco contributed to the sharp increase in India’s industrial production.

Finally, some good news on India’s economy – at least on the surface.

The country’s factory output surprisingly jumped 6.8% in January from a year earlier, much higher than the average 2.1% growth forecast by economists.

Manufacturing output was key to boosting industrial activity in the period, rising 8.5% on year. Consumer goods also helped, increasing 20.2% in January from a year earlier.

This comes days after India’s central bank lowered the minimum cash requirement, a move aimed at providing some relief to the country’s liquidity-strapped banks.

Ahead of Monday’s data, many worried that global economic woes and high borrowing rates meant that industrial activity wouldn’t pick up any time soon.

After all, in December industrial output only increased 2.5% from a year earlier and the country’s economic growth slowed in the last three last months of 2011.

So what’s behind this unexpected jump?

Some are giving little weight to the data, suggesting it may just be an exception in an economic environment that remains bleak.

Others worry this will mean India’s central bank will not feel pressured to lower its key interest rate at its policy meeting on Thursday. Although inflation slowed to 6.55% in January from a year earlier, the Reserve Bank of India is still uneasy with the figure so may be reluctant to cut its lending rate.

The central bank’s move will be closely watched as the Indian government unveils its annual budget on Friday.

Here is a roundup of what economists had to say about the rise in India’s factory output.

“Strange but true?” This was the reaction of Robert Prior-Wandesforde and Santitarn Sathirathai, economists at Credit Suisse, to the unexpected rise in India’s industrial production. They had actually given a rosier prediction than most (a 4% increase) but didn’t see this one coming.

They pointed to increased spending on non-durable consumer goods as key to the growth in factory output, saying it reflects the drop in food prices “which has provided a powerful boost to real personal incomes.”

The two economists believe that the data is unlikely to have much of an impact on the RBI: “There is little evidence to suggest that India’s central bank pays close attention to the industrial figures, but to the extent that it does, the release is unlikely to provide that much comfort. After all, the most interest rate sensitive components of production (consumer durables and capital goods) continued to contract.” They think the RBI can present “a strong case” for slashing the repo rate, its key lending rate, as early as this week.

Nomura went one level down in the detail, noting that among consumer non-durables, “chewing tobacco, sugar and edible oil rose sharply higher.” So maybe any optimism should carry the caveat that Indians stocked up on three things bad for their health, and one of which will sully the pathways and building walls of the nation even more.

Rupa Rege-Nitsure of the Bank of Baroda was among those who think the factory output data will likely reduce the pressure on the central bank to cut its lending rate right away. She said that the RBI may finally start cutting rates only after the government presents its budget.

Glenn Levine, senior economist at Moody’s Analytics pointed out that “the headline production figure probably overstates the current strength of Indian industry a little.” Mr. Levine noted that the sharp improvement in some production categories, such as consumer non-durables, is unlikely to last long. However, should more positive data follow, they may rethink their economic outlook for India.

“We won’t be changing our India forecast in response to a single number, but we’ll be monitoring the data closely in the coming months. If this strength is maintained, we’ll have little choice but to take our piece of humble pie and quietly lift the forecast. We’re still bearish, but we’re wavering,” added Mr. Levine in a note to investors.

The Confederation of Indian Industry also weighed in on the data. In a statement, CII head Chandrajit Banerjee, warned that “while this is an improvement over the December 2011 figures, CII would not like to say that there is a clear turnaround in progress particularly since the subsectors which indicate investment activity are all performing very poorly.”

Mr. Banerjee called on the RBI to cut its lending rates. “It is very clear that under the circumstances it is only appropriate that the interest rates are reduced by the RBI at the earliest opportunity and the current rates of excise are continued in the Union Budget to allow the manufacturing sector to recover from a full blown slowdown.”

source: wsj


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