March IIP at 2.5% as capital goods, manufacturing lead

Moneycontrol Bureau

The Index of Industrial Production (IIP) for March was 2.5 percent, compared to market expectations of between 2.0-2.2 percent, and further raised hopes that the worst may be over for the economy. This is the best monthly IIP reading since the October 2012 number of 8.2 percent, which was attributed mainly due to the festive season, and turned out to be a false start.

IIP for fiscal 2012-13 now stands at 1 percent compared to 2.9 percent for the previous fiscal.

The March reading was driven by a robust growth in manufacturing sector and the capital goods sector. This is the second consecutive month of strong growth in the capital goods sector, which grew 9 percent in February. Consumer goods continued to show signs of flagging, while consumer durables witnessed a steep year-on-year decline.

The strong growth in capital goods has surprised economist and market players as there is little anecdotal evidence to show that the investment cycle is picking up.

However, brokerage house Credit Suisse Thursday said that a revival in the investment cycle was already underway. The brokerage said in its report that that investment recovery generally begins with small and medium sized companies. This goes unnoticed as most analysts communicate with bigger companies to get an update on capex programmes.

Looking at the March number, economists said the worst may be over for the economy, but a full fledged recovery could take a while.

Between Last April and now, the Reserve Bank of India has cut the benchmark repo rate (at which it lends to banks) by 125 basis points, but banks have cut their base rates by less than 50 basis points, citing tight liquidity in the system.

Last week, the RBI said that it had limited room for further easing of interest rates because of multiple pressures, most notably inflation, and that government policy action was needed to get revive the investment cycle.

Also read: What slowdown? Investment cycle recovery underway

Following is a snapshot of the March IIP numbers

• Manufacturing Sector Growth 3.2% Vs -3.6% (YoY)
• Electricity Sector Growth 3.5% Vs 2.7% (YoY)
• Mining Sector Growth -2.9%  Vs -1.1% (YoY)
• Basic Goods Growth At 2.6% Vs 1.1% (YoY)
• Capital Goods Growth 6.9% Vs -20.1% (YoY)
• Intermediate Goods Growth -0.2% Vs 0% (YoY)
• Consumer Goods Growth  1.6% Vs 1.1% (YoY)
• Consumer Durables Growth -4.5% Vs 1.2% (YoY)