IIP Numbers Fall In July2011-VRK100-12Sep2011

Industrial Production Slowing Down

IIP numbers fall in July 2011

India’s Index of Industrial Production (IIP) for the month of July 2011 recorded 3.3 per cent growth compared to 9.9 per cent growth in the corresponding period of previous year. The IIP data were released on 12 September by the CSO. The stock market has reacted negatively as the market men are disappointed by the IIP numbers and they are wondering whether RBI will indicate a hike or pause in interest rates when it meets for policy decision on 16 September.

The IIP growth for July 2011 is very low when compared to IIP for June 2011 which had shown a growth of 8.8 per cent. Factory output in India is measured by IIP. The growth of 3.3 per cent in July 2011 is the lowest since October 2009 when IIP showed a growth of 2.3 per cent. The cumulative growth for the period April-July 2011 stands at 5.8 per cent over the corresponding period of the previous year versus 9.7 per cent growth for April-July 2010.

The IIP numbers for the Mining, Manufacturing and Electricity sectors for the month of July 2011 recorded growth rates of 2.8 per cent, 2.3 per cent and 13.1 per cent respectively. The share of manufacturing is 75.5 per cent, Mining 14.2 per cent and Electricity 10.3 per cent in the IIP.

Among the manufacturing sector, ‘food products & beverages,’ ‘basic metals,’ and ‘motor vehicles & trailers’ are showing good positive growth. Whereas, ‘textiles,’ ‘chemicals,’ and ‘electrical machinery’ are showing negative growth.

The ‘use-based’ classification of IIP indicates that capital goods and intermediates goods are showing a negative growth of 15.2 per cent and 1.1 per cent respectively. Whereas, consumer goods and consumer non-durables are showing positive growth.

What do the IIP figures indicate?

Industrial production in India is slowing down clearly and the figures are a testimony to the slowdown. The steep decline was marked by a sharp slowdown in the capital goods and intermediates sectors, indicating deceleration in manufacturing sector. GDP figures for April-June 2011 quarter also point to the same trend.

HSBC’s Purchasing Managers’ Index (PMI) for India fell to 52.6 in August from 53.6 in July 2011. Lower exports growth is responsible for the fall in PMI. The PMI reflects acquisition of goods and services based on a survey of over 500 companies. Car sales are showing a decline. Business confidence too has come down.

All indications are that there is a general slowdown in the Indian economy. 

Will RBI raise interest rates on 16 September?

The reaction of the stock market to the IIP numbers is negative. Stock prices of capital goods companies, Larsen & Toubro, Crompton Greaves, Thermax, etc., have fallen sharply as soon the IIP numbers are out. Due to sovereign debt crisis in euro zone, especially in Greece, the stock markets around the world have fallen heavily. Against this background, the outlook of Indian stock market is not optimistic for the time being. Now, the markets are looking forward to the policy decision from Reserve Bank of India.

Everybody knows that India’s inflation is due to various factors not directly linked to the monetary policy. RBI’s policies may not curb the present inflation which is more structural – supply chain problems, low agricultural productivity, high fuel & commodity prices exaggerated by global factors, and years of higher growth in personal incomes. The onus is more on the Government of India rather than on the RBI when it comes to tackling inflation.

For a detailed analysis of GDP and RBI’s moves, just click:

India GDP Apr-Jun 2011 Quarter

It would be a tough call for RBI on 16 September. On 15 September, inflation numbers for August will be announced. RBI will take into account both the IIP and inflation numbers before taking a call on interest rates. Overall, my feeling is that RBI will go for the jugular to curb inflation and may announce a 25-basis point (0.25 per cent) hike in Repo rate with some soft musings.

Notes: The Quick Estimates of Index of Industrial Production (IIP) with base 2004-05 for the month of July 2011 have been released by the Central Statistics Office of the Ministry of Statistics and Programme Implementation, Government of India. The General Index for the month of July 2011 stands at 166.6, which is 3.3 per cent higher as compared to the level in the month of July 2010.

Abbreviations: CSO – Central Statistics Office

Disclaimer: The author’s views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. There is a risk of loss in equity investments. Investors need to consult their certified financial adviser before making any investment decisions.

For author’s articles on financial markets, just click:

www.scribd.com/vrk100

www.ramakrishnavadlamudi.blogspot.com