Falling industrial output numbers in Feb. due to high base effect: Analysts

According to the latest Index of Industrial Production (IIP), India's factory output has contracted a record 15-year low of 1.2 percent in February 2009 on a year-on-year basis as against 9.5 percent growth in February 2008.

In terms of industries, the IIP data showed that as many as nine out of the seventeen industry groups have shown negative growth during the month of February 2009 as against the corresponding month of the previous year.

Of special concern was the 1.4 percent decline registered by the manufacturing sector, which constitutes around 80 percent in the IIP, compared to 9.6 percent growth a year ago.

However, according to the economists, the latest IIP numbers are according to their expectations and the decline was principally due to high base effect.

According to Yashika Singh, research head at Dun & Bradstreet India, the negative growth of 1.2 percent in IIP for February 2009 could, in some part, be attributed to a high base effect.

According to Singh, IIP has in fact grown by 0.2 percent on month-on-month basis in February 2009 if one looks at the de-seasonalized data.

"As the impact of the measures taken by Reserve Bank of India (RBI) and the government will continue to play out over a period of time, we expect IIP growth to remain subdued till the first quarter of fiscal year 2009-10. Data available also points to some buoyancy in investment proposals in the last quarter of the previous financial year, which may provide some cushion to overall industrial production," she added.

Agrees Subir Gokarn, chief economist at CRISIL, who has attributed the decline to a high base effect due to very high growth numbers in February 2008.

According to Gokarn, the IIP numbers would remain mildly negative for some time with export-oriented sectors continuing to reel under the impact of global numbers. However, stimulus packages, particularly on the credit side, are beginning to show an impact on the economy, with some sectors like auto doing better in February this year, he said.

According to Atsi Sheth, chief economist of Reliance Equities, "the worst in terms of falling output, I think it is definitely behind us."

"February is sort of a strange month. On a month-on-month basis, February activity tends to be a little bit lower than January. You are also seeing the impact of the statistical base effect. February last year was a very strong one. So, (negative) 1.2 percent was actually expected by most people. So, the fact that it has come in around that level is a good sign to my mind," she said.

According to Sheth, through different programs, the government is injecting money into the system but IIP numbers will not improve quickly till private sector demand picks up. "Our forecast is that some time in April, you will see IIP turn positive," she said.

According to Sonal Varma, economist at Nomura Financial, although industrial output contracted in February on a year-on-year basis, things are not as bad as they look.

"Given the very high base effect and lesser working days in February, the industrial output growth is not as bad as the headline suggests. The pick-up in consumer durables and capital goods is a positive sign. Our view is that real GDP growth will bottom out at 4.5 percent in the second quarter of 2009, with a gradual recovery thereafter in the second half of fiscal year 2009-10 as policy measures begin to have an effect," Varma said.

According to Varma, the sequential momentum has gathered and while external demand continues to be weak, there are tentative signs of better domestic demand.

"The pick-up in consumer durables and capital goods is a positive sign," Varma said.

"This reading is consistent with our expectation of average IIP growth of 2.5 percent for the year as a whole. However some early signs of revival are already seen, especially in sectors like auto, cement and steel. From April onwards we may see positive readings for IIP," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

"Economic recovery is around the corner. Recent auto sale numbers, the credit proposals received by banks from various sectors like infrastructure, etc, these are certainly good leading indicators. Going forward, we can say that the first quarter of this financial year may not be as bad as the last quarter of 2008-09," she said.

According to Shubhada Rao, chief economist at Yes Bank, the decline in IIP numbers is due to the high base growth witnessed last February (2008).

"Going forward, growth will be oscillating between marginal negative and marginal positive in the coming months. We see fiscal year 2008-09 IIP growth at 2.5 to 2.7 percent, a repeat of fiscal year 2001-02. However, with the recent positive news on some sectors, we expect IIP to improve in fiscal year 2009-10 to 3.5 to 4 percent," Rao said.

Agrees Deepali Bhargava, economist at Ing Vysya Bank. "IIP was as per our expectations. We expect the March number to be negative as well, taking the April-March fiscal year 2008-09 IIP growth to about 2.3-2.5 percent," she said.