India Industrial Output Jumps 8.2%, Beats Forecast

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Rainier Ehrhardt

A big surge in manufacturing output pushed India's industrial growth to its highest in more than a year in October, a sign that Asia's third largest economy may have turned a corner that strengthens the central bank's case against a rate cut.

The Reserve Bank of India (RBI) has kept interest rates on hold since April because of stubborn inflation, defying calls from business and politicians for help in fighting a slump that has dragged the economy toward its slowest growth in a decade.

The index of industrial production grew 8.2 percent annually in October, data released by the Central Statistics Office showed on Wednesday, well above the 4.5 percent forecast by a Reuters poll.

October factory and mine output showed the strongest growth since June 2011, after IIP growth spent most of this year close to, or below zero percent. However, the industrial index is a volatile indicator that often lurches violently.

Economists said the rebound was largely due to a low base a year earlier, when religious festivals closed factories.

"We should be careful in not over-interpreting this number. With some shifting of festivals in October and more number of working days, we should see some payback in November," said A. Prasanna, an economist with ICICI Securities.

"That said, there are enough signs of optimism. A lot of supply side issues that were there last year, seem to have gone away."

India's year-on-year rate of GDP growth has been below 6 percent for the past three quarters, damagingly sluggish for a country that aspires to at least 8.5 percent annual expansion to provide jobs for its burgeoning population.

This year's sharp slowdown prompted Prime Minister Manmohan Singh in September to push through some of the boldest reform measures of his eight-year tenure despite political opposition, trying to jolt the economy back to more rapid growth.

Those measures have revived domestic markets but until now had not been felt in the wider economy.

Taming Inflation

The turnaround in industrial output, which contracted a revised 0.7 percent a month earlier, was helped by a revival in infrastructure development, where the government has been trying to clear red tape restraining large projects.

Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 percent to overall GDP, rose 9.6 percent from a year ago.

Persistently high consumer price inflation, reported on Wednesday at 9.9 percent in November, will provide more ammunition for RBI Governor Duvvuri Subbarao to maintain a hawkish monetary policy stance at a policy meeting on Dec. 18.

The central bank has said any interest rate cut is "highly improbable" at the meeting next week, since it expects price pressures to remain elevated following a hike in the price of heavily subsidised diesel in September. Some economists expect a cut in cash reserve ratios (CRR) for banks, to help liquidity.

(Read More: Why Things Will Get 'Easier' for India's Economy Next Year)

Any data signals that the economy is past the trough of its slowdown will bolster the RBI's case that taming inflation should take precedence over reviving growth in its rate-setting policy.

November wholesale price index data, which the Reserve Bank of India gives more weight to in setting policy than the relatively new consumer price index, is due to be released on Friday.

"With inflation likely at 7.8 percent in November, a rate cut is ruled out in December. I do not expect any CRR cut also as the government is maintaining large cash balances with the RBI," said Sujan Hajra, chief economist with Anand Rathi securities in Mumbai.

Indian markets showed little reaction to the data as analysts dismissed the gain in output as a likely one-off and highlighted the volatile nature of the index.