Indian Manufacturing Sector Shows 2.5% Growth In Industrial Production, But Slow Growth Rate Alarms Officials To Spur Investment

The Indian government says the country's industrial output is up but underlying growth in the sector is still weak.

The Ministry of Statistics released March numbers Friday showing that industrial production grew by 2.5 percent vs. March of 2012. That's a better year-over-year growth rate than February's 0.5 percent increase, and it beat a Bloomberg survey estimate of 2.4 percent growth. The index of industrial production (IIP) grew despite the fact that the Reserve Bank of India (RBI) slashed interest rates three times since the beginning of 2013.

However, some observers say the sector is volatile and the upbeat spin might not last long.

The 2.5 percent positive figure was partly attributable to a 6.9 percent rise in capital goods (year over year) and a 2.6 percent rise in basic goods. But intermediate goods were down 0.2 percent, indicating a slowdown in demand.

"It's a pretty weak number," Sonal Varma, an economist at Nomura, told the Financial Times. "Last March the IIP was down by 2.5 or 3 percent, and if we have this level of growth besides that base effect, then it doesn't look like the underlying momentum is that good." At best, Varma said, the investment cycle is bottoming out.

According to some analysts, markets have been known to fall after upbeat IIP figures because they signal that the RBI won't continue the current cycle of rate cuts.

"Interest rates need to be further moderated to stimulate investment activity," Federation of Indian Chambers of Commerce and Industry President Naina Lal Kidwai told the Financial Express.

Chandrajit Banerjee, Confederation of Indian Industry director general, seemed to agree, saying, "We are looking forward to an accommodative monetary policy regime to spur investment."

Commerce and Industry Minister Anand Sharma, who expressed concern about industrial production's growth rate Friday, said that the Industry Task Force will review the manufacturing sector and ensure that investment gets fast-tracked.

"Manufacturing growth has a very clear social dimension when it comes to job creation. We keep a watchful eye," Sharma told reporters. "The Cabinet Committee on Investment is clearing major projects.

Echoing that concern, CII's Banerjee said investment revival measures must be the highest priority: "There is an urgent need to fast-track project clearances by the Cabinet Committee on Investment."