March IIP surpasses all expectations at 7.3% vs 3.7% (MoM)

India's industrial production grew a terrific 7.3% in March 2011, higher than an upwardly revised 3.65% growth a month ago. This could allay fears of a slowdown in the economy that will allow the central bank to continue with rate hikes to control stubbornly high inflation.

A CNBC-TV18 poll had predicted the same to come around 3.61% against the 3.6% recorded in the previous quarter. (Click here to know what CII projected) For the year (FY11) industrial output grew only 7.8% compared to 10.5% clocked in the previous fiscal. Radhika Rao, economist at Forecast PTE says, "Recovery has stemmed from pick-up in capital goods production, even as consumer goods moderate on rising borrowing costs and higher input prices." A mixed bag of numbers Capital goods during March rose a robust 12.9% compared with a contraction of 18.4% last month. Non-durable goods growth came in at 5.7% versus 1.5% (YoY). Manufacturing, which constitutes about 80% of the industrial production, rose an annual 7.9% versus 16.4%. While mining grew a minuscule 0.2% as against its growth of 12.3% during the same month last year, capital goods too saw growth of only 12.9% versus 36% (YoY). During the month, the electricity sector rose 7.2% versus 8.3% (YoY), while basic goods grew only at 4.3% as against 10.8% (YoY). March intermediate goods growth came in at 5.4% versus 13.5% (YoY). Consumer goods grew 7.7% versus 9.3% while consumer durables rose 12.3% Vs 32.6% (YoY). Analysts say rising input costs driven by commodity, and energy prices could erode the margins of manufacturing firms in India, as the investments have already slowed down in the sector. Does this indicate positive inflation trend going forward? Headline inflation surged to nearly 9% in March, well above forecasts. The RBI expects the headline inflation to remain around 9% in the April-September period. Kotak Mahindra Bank's chief economist Indranil Pan feels inflation mat turn positive by the second half of this year. "By then the RBI should halt its monetary tightening spree and we will possibly get into a more stable zone for interest rates. Also the way commodity prices are moving in accordance with the growth dynamics, I am slightly positive on inflation number in the second half of the year," he says. What does the crystal ball say? "The underlying growth in the industries has improved significantly in the second half of FY11, a trend which we expect would continue in FY12. We expect low double-digit number IIP growth in FY12 as against 7.5% kind of levels in FY11," says Sujan Hajra, chief economist at Anand Rathi Financial Services. Gaurav Kapur, senior economist at the Royal Bank of Scotland has a full-year target of 7.8% for IIP. "Going forward, I remain sceptical on capital goods and the investment activity in general. A one-month jump, which can purely be seasonal, may not indicate a change in trend. Interest rates have moved unfavourably in terms of both investment and consumption." For more details, watch Kaushik Basu's comments on CNBC-TV18. Did you miss: Food inflation at 7.70% YoY on April 30