Industrial production (IIP) falls 1.8%

Industrial production declines in June,against a growth of 9.5 per cent a year ago.

Written by Agencies | New Delhi | Published:August 9, 2012 11:37 am

India’s industrial output (IIP – index of industrial production) contracted for the third time in four months in June,increasing pressure on new Finance Minister Palaniappan Chidambaram to move quickly to pull Asia’s third-largest economy from its worst slowdown in almost a decade.

The contraction provided further ammunition to the slew of private economists who downgraded their growth outlook for India this week,citing a worsening drought and political hurdles to economic reform.

The data bodes ill for Q2 (FY Q1) GDP growth which may well remain below 6 percent year-on-year. It highlights continued softness of the Indian economy amid contracting exports and weaker domestic demand,said Dariusz Kowalczyk,an economist with Credit Agricole CIB in Hong Kong.

Industrial output in June shrank 1.8 percent,driven down by a deep dip in manufacturing,the data released on Thursday showed. The number was lower than a forecast of 1.0 percent growth in a poll and sharply lower than 9.5 percent growth a year earlier.

Economic growth faltered to a nine-year low of 5.3 percent in the quarter ending in March,with corporate investors deterred by high interest rates and a policy gridlock. Several economists this week cut their full-year growth forecast for India to around 5.5 percent — which would be the slowest rate in 10 years.

India’s industrial output data is volatile but is still considered a barometer of GDP growth. May’s figure was revised to 2.5 percent from 2.4 percent,the data showed.

Manufacturing,which constitutes about 76 percent of industrial production,shrank an annual 3.2 percent from a year earlier,the federal statistics office said.

Markets dipped after the unexpected contraction. The rupee was last trading at 55.15 per dollar compared to around 55.08 before the data,though that was still stronger than its 55.42/43 close against the dollar on Wednesday.

The benchmark 10-year bond yield fell about 2 basis points to 8.11 percent from levels before the data.

Capital goods,a key investment indicator that has shown growth only once in the past 10 months,slumped 27.9 percent in June,data on Thursday showed.

COMMENTARY

RADHIKA RAO,ECONOMIST,FORECAST PTE,SINGAPORE

Contraction in July IP is disappointing though validates that the production sector remains in doldrums. Note also the sharp 28 percent drop in capital goods production,which continues to distort the headline print.

Data will pile pressure on the new finance minister to jump start the reform process and revive investment interest,which is likely to be a key drag on overall growth heading into H2. On policy,RBI has made it clear that a rate cut at this juncture would stoke inflation risks rather than support growth on a sustained basis; this data is unlikely to have a material impact on the policy direction unless New Delhi addresses some of the structural growth constraints.

RUPA REGE NITSURE,CHIEF ECONOMIST,BANK OF BARODA,MUMBAI

It’s pointing to a very serious slowdown versus 5.7 percent growth in the first quarter of FY12. Low investments,contracting exports and weak monsoons will drag India’s GDP growth below 5 percent for FY13. Pressures will now mount on RBI to ease monetary policy,though a firm fiscal action is more relevant for reviving investments in a sustainable fashion.

DARIUSZ KOWALCZYK,ECONOMIST,CREDIT AGRICOLE CIB,HONG KONG

The data bodes ill for Q2 (FY Q1) GDP growth which may well remain below 6 percent year-on-year. It highlights continued softness of the Indian economy amid contracting exports and weaker domestic demand. The data is likely to facilitate a rate cut soon,and we continue to expect 50 bps this year.

ROBERT PRIOR-WANDESFORDE,ECONOMIST,CREDIT SUISSE,SINGAPORE

The emphasis of the Indian central bank will still be on inflation. We have seen this kind of weakness in growth for sometime,and the Reserve Bank of India has been ignoring it. History suggest that they will continue their focus on inflation.

ANUBHUTI SAHAY,ECONOMIST,STANDARD CHARTERED BANK,MUMBAI

This is yet another reminder of growth woes and will be drag on April-June gross domestic product data. However,with inflation still at elevated levels and increased upside risk on less than adequate monsoon,any rate cut is unlikely to come soon.

KUMAR RACHAPUDI,FIXED INCOME STRATEGIST,BARCLAYS CAPITAL,SINGAPORE

The number was weaker than expected,much lower than consensus and our forecasts. It is unlikely that we will see a material turnaround in the near term given that headwinds of low confidence and high interest rates remain along with disruptions (such as Maruti and power supply disruptions) in July. This number will likely result in market increasing expectations of a rate cut. We continue to recommend long bonds.

SHAKTI SATAPATHY,FIXED INCOME STRATEGIST,A K CAPITAL,MUMBAI

The data reiterates broad based slowdown across key sub indices and calls for a fiscal led growth revival strategy followed by monetary easing in the coming months.

Though the favourable base impact might support the output data in the coming months up till November,the recent power outage and delay in government’s growth revival action plan would keep it subdued.

We further expect the lending rate repricing in the coming weeks by majority of the lending institutions would have a positive bearing on the consumer durable segments.

INDRANIL PAN,CHIEF ECONOMIST,KOTAK MAHINDRA BANK,MUMBAI

Significant dip in the capital goods numbers have pulled down the manufacturing numbers. However,we think that the erosion in the IIP is unlikely to be significant from hereon and there should be some technical bounce coming back with the low base of the last year kicking in soon. Overall,this low number is unlikely to be a clincher for the RBI in terms of its rate decision.

SUJAN HAJRA,CHIEF ECONOMIST,ANAND RATHI SECURITIES,MUMBAI

The growth scenario,and particularly the investment scenario for 2012/13 looks grim. If the monsoons remain weak,we see gross domestic product growth of 5.4 percent for the fiscal. The Reserve Bank of India’s first priority remains controlling inflation,and unless they achieve some success there,they will not ease interest rates.

MARKET REACTION

* India’s benchmark 10-year bond yield eased 2 basis points to 8.10 percent after the factory data.

* The main share index trimmed gains to trade up 0.2 percent from 0.4 percent beforehand.

* The benchmark five-year OIS rate dropped 2 basis points to 7.06 percent.

* The partially convertible rupee trimmed gains to 55.18 per dollar from 55.08 beforehand.

BACKGROUND

– India’s new finance minister sought on Monday to allay investor worries about an economy growing at its weakest pace in almost a decade by pledging to address their concerns over taxes,public finances and interest rates.

– A summer drought makes a bad situation worse for an Indian economy already crippled by a sharp slowdown in growth,persistent inflation and a politically hamstrung government.

– More economists slashed their economic forecasts for India,with Citigroup and CLSA cutting their outlooks for growth to 5.4 percent and 5.5 percent respectively in the fiscal year ending March,with a weak monsoon adding to economic headwinds.

– Citigroup said a policy gridlock,recent power outages,weaker exports and falling domestic consumption will take a toll on Asia’s third-largest economy.

– On Tuesday,rating agency CRISIL cut its growth forecast to 5.5 percent for the fiscal year ending March,just two months after pruning its projection to 6.5 percent from 7 percent.

– Growth faltered to a nine-year low of 5.3 percent in the March quarter,due to stalled economic reforms and higher interest rates.

– The Reserve Bank of India left interest rates unchanged in July for the second straight review,showing that bringing down stubbornly high inflation is its top priority even as economic conditions deteriorate.

– The main gauge of inflation,the wholesale price index,likely grew 7.37 percent year-on-year in July,compared with 7.25 percent in June,a Reuters poll showed.

Industrial output dips by 1.8%

(PTI) Worsening economic situation pulled down industrial output by 1.8 per cent in June,third fall in four months,disappointing Finance Minister P Chidambaram who said bottlenecks must be removed to facilitate fresh investments in critical sectors.

The dismal data for June,2012-13 includes a huge downslide of 28 per cent in capital goods sector giving a clear signal about lack of fresh investment in the economy.

The manufacturing segment which has a weight of 75 per cent in the Index of Industrial Production (IIP) dropped by 3.2 per cent in June,prompting the industry to seek immediate reduction in interest rates.

The negative IIP numbers released today,compare with a healthy growth of 9.5 per cent in June in the previous fiscal.

“The Quick Estimates …are disappointing. It is important to focus on the critical sectors,remove bottlenecks and give a fillip to production,” Chidambaram said.

He said production would revive “if there are new investments in the demand-creating industries”.

Planning Commission Deputy Chairman Montek Singh Ahluwalia also expressed concern over deceleration in the factory output.

“The industrial numbers have been disappointing for the first few months,” he said. Ahluwalia sounded less optimistic even for the coming months. “I do not see robust industrial growth in the current fiscal,” he said.

The cumulative IIP for the April-June quarter also showed a negative trend of 0.1 per cent,as compared to a positive 6.9 per cent in the same period last fiscal.

Analysts feel the worsening economic situation will put pressure on the Finance Minister to quickly move ahead with the initiatives announced by him earlier this week.

Industry chambers and the stock markets also showed their concern over the falling factory output. The benchmark Sensex lost about 140 points from its peak today after release of IIP data.

Baring the month of May,industrial output has witnessed contraction since March. In May the IIP grew by 2.5 per cent.

In June,14 of the 22 industry groups in the manufacturing sector showed a positive growth.

According to RBI,the slowdown in the economic growth which started in the last quarter of 2011-12 fiscal has crept into the current fiscal.

The RBI has lowered the GDP growth projection for the current fiscal to 6.5 per cent,from 7.3 per cent earlier.

After growing at a rapid pace of over 8 per cent in last three year,the economic growth slowed to a nine-year low of 6.5 per cent in 2011-12.

“The slowdown in the growth of the economy is mainly on account of the slowdown in the industrial sector and lower growth registered in the agriculture sector,” Minister of State for Finance Namo Narain Meena said in a written reply to a query in the Rajya Sabha.

Industry chamber Ficci demanded a cut in interest rates to revive demand and boost investment.

“There is a strong case for the RBI to cut interest rates further at least by 50 basis points immediately so as to encourage investments,” Ficci President R V Kanoria said.

Commenting on the data,Nomura economist Sonal Verma said: “Going forward,we expect IIP growth to move into positive territory,but remain weak due to sluggish exports,below normal monsoons,high inflation and continued government policy issues”.

In June,mining output grew by just 0.6 per cent against a contraction of 1.4 per cent in the same month a year ago.

The sector’s production in April-June quarter declined by 1.1 per cent compared to a growth of 0.6 per cent in the same period of 2011-12.

Consumer goods production grew by 3.5 per cent in June as compared to 3.1 per cent growth in the same month last year.

Quick Estimates of Index of Industrial Production and use-based Index for the Month of June,2012 (Base 2004-05=100)

The Quick Estimates of Index of Industrial Production (IIP) with base 2004-05 for the month of June 2012 have been released by the Central Statistics Office of the Ministry of Statistics and Programme Implementation. IIP is compiled using data received form 16 source agencies viz. Department of Industrial Policy & Promotion (DIPP); Indian Bureau of Mines; Central Electricity Authority; Joint Plant Committee; Ministry of Petroleum & Natural Gas; Office of Textile Commissioner; Department of Chemicals & Petrochemicals; Directorate of Sugar; Department of Fertilizers; Directorate of Vanaspati,Vegetable Oils & Fats; Tea Board; Office of Jute Commissioner; Office of Coal Controller; Railway Board; Office of Salt Commissioner and Coffee Board.

2. The General Index for the month of June 2012 stands at 168.3,which is 1.8% lower as compared to the level in the month of June 2011. The cumulative growth for the period April-June 2012-13 stands at (-)0.1% over the corresponding period of the previous year.

3. The Indices of Industrial Production for the Mining,Manufacturing and Electricity sectors for the month of June 2012 stand at 124.3,178.1 and 157.0 respectively,with the corresponding growth rates of 0.6%, (-)3.2% and 8.8% as compared to June 2011 (Statement I). The cumulative growth in the three sectors during April-June 2012-13 over the corresponding period of 2011-12 has been (-) 1.1%,(-)0.7% and 6.4% respectively.

4. In terms of industries,fourteen (14) out of the twenty two (22) industry groups (as per 2-digit NIC-2004) in the manufacturing sector have shown non-negative growth during the month of June 2012 as compared to the corresponding month of the previous year (Statement II). The industry group ‘Radio,TV and Communication Equipment and Apparatus’ has shown the highest growth of 16.8%,followed by 15.7% in ‘Medical,precision & optical instruments,watches and clocks’ and 15.3% in ‘Publishing,printing & reproduction of recorded media’. On the other hand,the industry group ‘Electric Machinery and apparatus n.e.c.’ has shown a negative growth of 56.0% followed by 5.7% in ‘Food products and beverages’ and 5.4% in ‘Tobacco products’.

5. As per Use-based classification,the growth rates in June 2012 over June 2011 are 4.1% in Basic goods,(-) 27.9% in Capital goods and 1.6% in Intermediate goods (Statement III). The Consumer durables and Consumer non-durables have recorded growth of 9.1% and (-)1.0% respectively,with the overall growth in Consumer goods being 3.5%.

6. Some of the important items showing high negative growth during the current month over the same month in previous year include ‘Cable,Rubber Insulated’ [(-)82.0%,‘Sugar’ [(-)66.1%,‘Sponge Iron’ [(-)17.2%,‘Fruit Pulp’ [(-)22.4%,‘Three-Wheelers’ [(-)-29.4%,‘Di Ammonium Phosphate’ [(-)54.1%,‘Cement Machinery’ [(-)40.0% and ‘Colour TV Picture tubes’ [(-)79.7%.

7. Some of the other important items showing high positive growth are: ‘Aerated Waters & Soft Drinks’ (58.3%),‘Biaxially Oriented Polypropylene (BOPP)Film’ (35.1%),‘Petroleum Coke’ (70.8%) and ‘Woollen Carpets’ (61.5%).

8. Along with the Q.E. of IIP for the month of June 2012,the indices for May 2012 have undergone the first revision and those for March 2012 have undergone the final revision in the light of the updated data received from the source agencies. It may be noted that these revised indices (first revision) in respect of May 2012 shall undergo final (second) revision along with the release of IIP for the month of August 2012.

9. Statements giving Quick Estimates of the Index of Industrial Production at Sectoral,2-digit level of National Industrial Classification (NIC-2004) and by Use-based classification for the month of June 2012,along with the growth rates over the corresponding month of previous year,including the cumulative indices and growth rates,are enclosed.

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