Mar IIP nos low due to base effect: Experts

The IIP numbers have come in with a bit of a shock with the March industrial growth at 3% as compared to 8.6% in February, reports CNBC-TV18.

A CNBC-TV18 poll saw it at 5.7%. FY08 industrial growth is seen at 8.1% as against 11.6% YoY.

March manufacturing growth is seen at 2.9% versus 16% YoY.

Commenting on the IIP numbers, Sucheta Mehta, Economist, Standard Chartered Bank said the March numbers are lower due to base effect. She expects 7.4% overall industrial growth. High inflation and interest rates may dent industrial growth more, she added. Further, she stated the rupee may touch 42.50 per dollar by the end of September.

“It is a number that is clearly disastrous and way below market expectations. The big drop comes from metal products and parts other than machinery, which perhaps bodes well with the kind of inflationary trends seen in metals particularly iron and steel. So, it might be a reflection of that. It is too early to say what the other causes are. Again, textiles remain weak and so do food products. But the main culprits are metal products,” added Mehta.

Commenting on the numbers, “There is some kind of deceleration in activity on the industrial production front. This will have a bearing on overall GDP growth. We believe that the RBIs projections of about 8% growth are a bit too optimistic. We believe industrial growth could be 7.4%. If these numbers continue to show weakness, it might mean that there is more downside risk to GDP growth. To some extent it was a reflection of base effect.”

Shubhada Rao, Chief Economist, Yes Bank said such a low number has been seen after a long time. Rao added that manufacturing has dragged the whole number down and the second round of costs are yet to get manifested in inflation numbers.

”Such a low number has not been recorded in the last many years. In February 2002, the number was about 2.3. After a very long time, we have seen such a low number. This number brings the overall IIP at 8.3 for the year and inline with anticipation of about 8.5. But the March number has been well below our own expectation of 6.2. It is manufacturing which has dragged the whole number down.  It is a cause of concern because thermal cost, iron ore costs and cost of steel is going up. Clearly, the second round of these costs are yet to get manifested in inflation numbers.”

“Consumer durables would probably have gone in the negative territory. For capital goods, there is some growth fatigue.  Our forecast for the year for IIP is 7.5% for FY09. Clearly, the news is more on the adverse side rather than positive side at least from the costs side,” she added.

Pranab Sen, Head, CSO, attributes the low IIP number to base effect and sees FY09 IIP at 8-8.5%.

“There is certainly a base effect and industrial growth has slowed down in the current year from about 10-10.5 in the previous year. If you look the numbers month-on-month (MoM) and look at March over February, you will find a 23-point increase in the general index, which will translate to a growth of nearly 8.5%. Basically, in March 2007, growth had been 37 points over a base of 250; so that was a huge increase. We are really seeing the base effect and there is really no slowing down if you look at it over the trend on a MoM basis,” he added.

Sanjeev Sanyal of Deutsche Bank said the number is very volatile and industrial production is slowing quite sharply.

“The number is very volatile. Industrial production is slowing quite sharply. I have been arguing that growth is likely to be closer to 7% than over 8-9%. Don’t get too swayed by a single month’s number. There is a base effect there. Growth is slowing towards 7% at this juncture. GDP, over the next year or so, will be in the 7-7.5% range, which is clearly below what the government expects,” he stated.