Lehman expects industrial output to face headwinds

MUMBAI: Despite the strong October data, Lehman Brothers expects India’s industrial output to continue to face headwinds from past interest rate hikes, rupee appreciation and softening world demand.

Also, the base effect is likely to turn adverse as output grew by an average of 13.3 per cent year-on-year between November 2006 and March 2007.

The economy is heading into a cyclical soft patch. We expect GDP growth to slow to 8.8 per cent in FY08 from 9.4 per cent in FY07.

However, we remain bullish on India’s medium-term prospects and expect investment demand, led by private corporate capital expenditure and infrastructure spending, to remain the key driver of the economy, Lehman Brothers says on the rebound in India’s industrial output in October.

India’s industrial output growth rebounded to a stronger-than-expected 11.8 per cent y-o-y in October from an upward revised 6.8 per cent in September (initially reported at 6.4%). The three-month moving average rose to 9.7 per cent in October from 8.3 per cent in September.

The rebound was mainly the result of base effects: industrial output grew 4.5 per cent in October 2006 because of a loss of working days caused by the Diwali festival.

Manufacturing output rose 13.3 per cent y-o-y in October versus 7.1 per cent in September. Mining and electricity output growth were sluggish at 3.7 per cent y-o-y and 4.2 per cent respectively in October.

The investment-led capital goods sector continued to be the main driver, with output growth at 20.5 per cent y-o-y in October, unchanged from September. Consumer goods output rose 12.5 per cent y-o-y in October from -0.9 per cent in September as both consumer durables and non-durables gathered steam.

Within the manufacturing sector, growth in 16 of the 17 sub-groups was positive. As in previous months, wood products, other manufacturing, leather and machinery and equipment sectors were the best performers, while food, textiles and paper products were the worst performers within manufacturing.

The surprises were the stronger up tick in the growth of beverage and tobacco and basic chemicals output, and sharper fall in the growth of metal products output (down 19.8% y-o-y in October).