India's factory output has decelerated for the month of November across industry groups. While manufacturing and electricity production decelerated, mining contracted by 5.5 per cent year-on-year. Production of consumer goods may have declined to one per cent from the 13.7 per cent year-on-year growth seen in October, but there has been no contraction. By use, capital goods contracted 7.7 per cent and intermediate goods by 1.1 per cent year-on-year.
However, this was largely due to clearing out of inventory that most retailers had held before the festive season, so factory clocked robust growth in anticipation of the festive season.
The good news is that the contraction was rather benign and that industrial growth has bottomed out. According to HSBC's chief India economist Leif Eskesen, "The correction was not as sharp as we have seen in the past, which suggests that the underlying momentum has improved in recent months, in line with the trend we have seen for PMI readings." Over the last few months, both global and domestic developments have gone a long way to lift sentiments and this is reflected in consumer sentiment. Going forward, consumer goods and durables will continue to grow till manufacturing and capital goods pick up. The sharp slowdown in auto demand, manufacturing has also dipped, but with growth reviving in FY14, automobile demand could also revive, economists believe.
Even if industrial output stays flat in December, the average industrial output for the third quarter of FY13 would look substantially better than in the second quarter. According to Mole Hau of BNP Paribas, "The outturns in the last couple of months also help set the stage for a decent quarter for the Indian industrial sector in Q3 FY2013 as even a flat month-on-month reading in December would result in third quarter production growth of 2.9 per cent year-on-year after a 0.5 per cent gain in the second quarter. The hard production data, combined with the latest round of survey evidence, therefore signal that the sector is showing some signs of life. But, while better, industrial activity in level terms is still below trend by our estimates even after the structural deterioration of recent years."
It's not merely the sentiment that is positive. While industrial production is showing signs of revival, PMI readings have been positive, too. In fact, economists believe that the industrial data may be under-estimating growth. Going forward, the view of the Reserve Bank of India on rate cuts and the government's on the twin deficit will determine the course ahead.