India: Don't read too much into uptick in factory output

An 8.2 percent uptick in India's industrial output for October wasn't all it's cracked up to be, the Wall Street Journal argues.

A whopping 8.2 percent uptick in industrial production in October may seem like a sign India's economy is poised for a turnaround, but the devil is in the details, says the Wall Street Journal.

As GlobalPost reported, India's industrial output rose 8.2 percent in October, beating expectations of just 4.5 percent forecast by a Reuters poll of analysts. 

But according to the WSJ, the real reason for the boost has to do with how the Diwali holiday fell on the calendar in 2011 and 2012.

"India’s festival period started in November while it took place in October last year," the paper notes. "Since production for the festival period tends to ramp up a month ahead of the festivities, festival-related production took place in September 2011 and in October this year. So the index in October 2011 was 158.3, down by nearly 4% from the month before."

But that's not the only reason for skepticism about a pending comeback.

According to the Journal, "this one month masks the anaemic growth in previous months. In fact, in five of the seven months between March and September, the index contracted – a clear indication of manufacturers’ reacting to falling demand by curtailing production and using up inventory. This is reflected in gross domestic product data."

Sales were also disappointing during the festival season, which is comparable to Christmas in the US as a barometer of consumer spending.

"In fact, during November, sales of passenger cars contracted by 8.25% from a year earlier while total passenger vehicle sales grew by less than 4% during November," the WSJ points out.

The good news? Despite those lackluster indicators, foreign investment has continued to roll in, and the government has finally pushed through a reform to allow foreign direct investment in multi-brand retail, potentially paving the way for additional economic reforms. And "his may improve business sentiment going forward, which may get reflected in a pick-up in investments."