IIP growth momentum may remain subdued in coming months

CARE Ratings has come out with its report on 'Index of Industrial Production for December 2011-12'. As per the rating agency the growth momentum is expected to remain subdued even in the coming months on the back of slowing industrial activities, low business sentiment coupled with sluggish investments climate.

Index of Industrial Production (IIP) for the month of December 2011 dipped to 1.8% compared with 5.6% for the same period last fiscal. Cumulative growth in FY12 in Apr-Dec 2011 stands at 3.6% (8.3%). This comes in lower than CARE's own estimate of 5.1% for the month which was based on a good PMI number and moderate performance of the core industries which account for around 38% of the IIP.

The performance of the Industry has been impaired by lower domestic demand and exports, supply bottlenecks, higher raw material costs on account of inflation, interest rate hikes, business sentiment and slow movement on the reforms front.

• The cumulative growth in the 'mining and quarrying' sector fell to -2.7% versus 6.9% seen for the same period last fiscal.
• Activities in the 'manufacturing' sector have slowed down significantly to 3.9% from 9.0%.
• Production in the 'electricity' sector has been improving with 9.4% growth compared with 4.7% seen for the same period last fiscal.

• In the manufacturing sector, 16 out of 22 industries have shown positive growth during Apr-Dec period of 2011.

- Metals classified under 'basic metals' (10.7%) and 'fabricated metals' (13.0%) have registered healthy growth.

- Motor vehicles and other transport equipment grew by 11.6% and 15.3% respectively while food products have grown by 17.4%.

- Non-metallic products and petro related products had moderate growth of 4.5% and 4.2% respectively.

- "Textiles' (-2.7%) and 'chemical products' (0.2%) industries have indicated deterioration during Apr-Dec FY12.

• As per the Use-based classification, corrosion is seen in the 'capital goods' (-2.9%) industry as well as the 'intermediate goods' (-0.8%) industry.

- Capital goods production has been affected by slowdown in infrastructure activity as well as investment which may be attributed to higher interest rates prevailing during the year.

- Basic goods, on the other hand, improved to show a growth rate of 6.1% for Apr-Dec FY12 compared with 5.8% for the same period last year.

- Consumer durable and consumer non-durable goods have witnessed growth of 5.3% and 6.1% respectively, with the overall growth in Consumer goods being 5.7% for Apr-Dec FY12. Growth in non-durables however, increased by 13.4% in December while that in durables was 5.3% only. The latter is on the lower side considering that December is a part of the festival season when typically consumer spending increases.

• The Advanced National Accounts Estimates released by the RBI this week have estimated that the manufacturing will grow by 3.9% for the financial year 2011-12.

- Electricity is estimated to grow by 8.3%. So far this year (Apr-Dec) the performance of the electricity sector has been in line with expectations and if the same trend continues the growth of 5.0% that is required in the remaining three months (Jan-Mar) appears to be attainable.

- On the other hand, manufacturing sector has shown a growth of 3.9% during Apr-Dec 2011. In order for the same to attain the estimated target, this sector has to grow by 3.9% in the remaining three months with the IIP index for manufacturing averaging 198 in each of the remaining months. This appears feasible for February though the base year effect poses a challenge in January and March (when it peaked at 206). Hence even the high PMI number for January could face resistance.

Policy stance
RBI's policy stance would tend to be guided more by the developments on inflation, which though on a decline in food products has to stabilize to make the RBI change its stance. Further, the core inflation rate has not moderated as desired by the RBI. Therefore, the RBI would not cut interest rates till the desired levels of inflation and stability in exchange rate is attained.

The Government has revised its growth projection for 2011-12 to 6.9%. We expect the growth momentum to remain subdued even in the coming months on the back of slowing industrial activities, low business sentiment coupled with sluggish investments climate.

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To read the full report click on the attachment