India's industrial output expanded at its fastest pace in 16 months in June, beating forecasts by a wide margin, as higher salaries of government employees and stimulus spending boosted consumer demand.
Economists said strong momentum in factory output could help mitigate the effects of a poor monsoon season on overall economic growth, but cautioned that the brisk rate of industrial activity might not be sustainable despite other recent positive signals.
"Although the June production number could well prove something of an aberration, bearing in mind just how strong it was, the trend in industrial output is clear," said Robert Prior-Wandesforde, senior Asian economist at HSBC in Singapore.
Some economists have warned that growth in Asia's third-largest economy could be pared by as much as 2 percentage points this fiscal year if rainfall remains inadequate in the current sowing season.
"While the poor monsoon is creating justifiable concerns about agricultural sector output, which in turn is prompting some to revise GDP forecasts lower, today's release suggests there is plenty of momentum in the ex-agricultural sector," he said.
Factory output in June rose 7.8 percent from a year earlier, expanding for the six straight month based on revised figures and outpacing a rise of 2.2 percent in May as New Delhi ploughed investment into infrastructure projects and spent more on rural jobs.
The output growth rate is the highest since February 2008 and far exceeded the forecast of 3.3 percent in a Reuters poll of analysts.
The 30-share BSE index pared losses but the rupee rose and then weakened slightly after the data, while benchmark bond yields rose marginally.
At its policy review on July 28, the central bank raised its inflation forecast for the fiscal year through March to around 5 percent from 4 percent but also signalled its intention to stick to its policy of easy money for the near term as it helps the government manage a record $95 billion borrowing plan.
Wednesday's strong industrial number would not be enough to trigger a move towards monetary tightening, said Gunjan Gulati, economist at JPMorgan Chase in Mumbai.
"We need to see continued and sustained strength in these economic indicators for the central bank to begin normalizing their policy stance," she said.
Output of consumer durable goods such as home appliances and cars rose 15.5 percent from a year earlier as government employees put their heftier paychecks to work, while capital goods production grew 11.8 percent, indicating fresh investments.
Mining output increased by 15.4 percent in June and manufacturing output rose by 7.3 percent, while electricity generation clocked an 8 percent growth.
By comparison, China's industrial output in July grew an annual 10.8 percent, its highest in nine months but lagging forecasts, indicating that emerging economies were leading the global economic recovery.
MONSOON CLOUDS OUTLOOK
Total rainfall since June 1, the start of India's four-month monsoon season, has been 28 percent below normal and the government said on Tuesday that more than a quarter of the country's districts were prone to drought.
With just over 40 percent of India's agricultural land irrigated, farm output is heavily reliant on rains and the shortfall could potentially hurt rural demand, which accounts for more than half of India's domestic consumption.
India's economy grew at 6.7 percent last year after three straight years of growth of 9 percent or more. Analysts forecast growth in the current year of 5.8 to 7.2 percent, but some have warned that faltering rains pose a downside risk.
"It looks like industrial output is being driven by strong domestic demand, though the poor monsoons may have a restraining impact. But this shows recovery is well underway," said A. Prasanna, economist at ICICI Securities Primary Dealership.
Data published earlier, including that of automobile production, had already indicated industrial output would expand in June, even though exports faltered.
The infrastructure sector grew 6.5 percent from a year earlier after 2.8 percent in May.
Exports fell an annual 27.7 percent in June to $12.8 billion, the ninth straight monthly fall. Weak exports augur poorly for manufacturing even though domestic consumption, at 57 percent of gross domestic product, accounts for the lion's share of total demand in India.
Signs of expansion continued in July, with car sales rising by a blistering 31 percent and a survey by Markit Economics showing manufacturing activity expanded for the fourth consecutive month.