July 12th, 2011

Index of Industrial Production (IIP)

The dismal performance of industrial production continues Higher inflationary pressures and slower activity in the manufacturing & capital goods sectors have resulted in slower growth of industrial production. India's industrial production growth fell to 5.6% (below the consensuses estimates of 8.5%) in May 2011, from upwardly revised 5.7% growth recorded in Apr 2011. This was evident from the eight core industries (weight of 37.9% in IIP) which fell by 5.3% in May 2011 as compared to 7.4% registered in May 2010. The higher inflation numbers have dampened the consumer sentiment as the consumer goods segment remained stagnant at 5.4% in May 2011. The Manufacturing sector which has largest weightage (~75%) in the IIP decelerated by 5.6% in May 2011 from 6.3% in Apr 2011. Besides manufacturing, the mining sector (weightage of 14.1%) also registered a muted growth of 1.4% in May 2011 & electricity generation (weightage of 10.3%) growth accelerated by 10.2% against 6.4% in Apr 2011. In used based industry, two out of the main four segments registered a lower growth in May 2011. Showing slower activity in the investment cycle the capital goods registered a slower growth of 5.9% in May 2011 from 7.6% in Apr 2011. Also the intermediate goods declined by 0.9% in May 2011 from 4.4% in Apr 2011. However, the basic goods increased by 7.2% in May 2011 from 6.8% in Apr 2011. Some of the important items of basic goods showing high growth during the current month include Molasses (102.9%), Stainless/ alloy steel (49.0%), GP/GC sheets (37.7%), sponge iron (33.6%), Fuel, Aviation Turbine (33.4%) and Steel Castings (30.3%). In terms of industries, 14 out of 22 industry groups in the manufacturing sector have shown positive growth during the month of May 2011 are Medical, precision & optical instruments, watches and clocks has shown the highest growth of 42.9%, followed by 36.4% in Office, accounting & computing machinery and 23.1% in Motor vehicles, trailers & semi-trailers. On the other hand, the industry groups Textiles and Wood and products of wood & cork except furniture; articles of straw & plating materials have shown the highest negative growth of 6.6% each. Conclusion With IIP slowing down considerably & high inflation numbers, the Reserve Bank of India would be facing a dilemma on policy changes in the next policy review. The food & fuel inflation remained above the RBI threshold limit showing the government's inability to control price rises through monetary policy. High inflation is pressuring the consumer demand & slower growth in investment activities (lower growth of FDI) would affect the economic growth of the country. Going ahead, to anchor inflationary pressures and rising price expectations the monetary policy is likely to continue to remain in tightening mode.

Wealth Research, Unicon Financial Intermediaries. Pvt. Ltd. Email: wealthresearch@uniconindia.in

July 12th, 2011

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Wealth Research, Unicon Financial Intermediaries. Pvt. Ltd. Email: wealthresearch@uniconindia.in