IIP growth unexpectedly surged to 4.2% for Jul'15 from 4.4% (revised upwards from 3.8% earlier) in the previous month. However, the growth seems skewed as nearly 62.0% of the contribution in growth is from capital goods and gems & jewellery sector. Although, the capital goods sector surged to 10.6% YoY, machinery and equipment; a leading indicator of infrastructure activity declined to 2.4% YoY. The surge in capital goods sector might be attributable to an increase in government spending. However, weak domestic and global conditions, as indicated by weak corporate sales and export growth respectively, continue to point towards sluggish IIP growth for the rest for the year
There is “nothing new that should be read into the IIP numbers for Jul’15. A boost in manufacturing has helped IIP to grow by 4.2% in July (SBI at 3.5%), which is a good news. However, sluggish growth in Electricity, compared to last year is a matter of concern,” says Dr. Soumya Kanti Ghosh, Chief Economic Adviser at SBI.
He however believes “The slowdown in China has presented a great opportunity for Indian companies to step into the shoes of China and attract more global investment. We expect August IIP to be even higher based on our internal prognosis”.
According to him “After a tepid quarter, we can hope for a better time ahead and sectors like cables, bearings, casting forging, leather, paper, cement will come out with better numbers in the rest of the year. Further we have seen a growth of 60% in the number of companies registered in Apr-Aug’14 to April-Aug15, which indicates that corporates are bullish and gearing up for the better days.
As an anecdote, to synchronize with the National Accounts Statistics (NAS), the Ministry of Statistics and Programme Implementation (MOSPI) is going to revise IIP base year from 2004-05 to 2011-12 in a improved way and include more items. Further, to reduce the volatility, the new base is going to consider at least 8-factories in each item groups, which will help to reduce the volatility due to temporary shutdown of production in any factories.”
Care Ratings while concurring with the views says “Industrial output recorded 4.2% growth for the month of July ’15 as against our own forecast of 2.7%. The relatively impressive growth in industrial output of 4.2% for July’15 can be said due to low base effect given that the growth was only 0.9 % in July’14 as well as some signs of infra activity taking place. The industrial activity picture indicates a mixed picture given that the core sector data revealed growth of just 1.1% in this month. While the ‘Mining’ (0.1% in July’14 and 1.35 in July’15) and ‘Manufacturing’ (- 0.3% in July’14 and 4.75 in July15) segments show some improvement over last year, output growth was lower than year ago level in case of ‘Electricity’ (11.7% in July’14 and 3.5% in July’15). The cumulative growth during the period Apr’15- July‘15 was registered at 3.5% marginally lower than 3.6% over the corresponding period in FY15,
Care believes “There is some expectation of a pickup in urban demand as festive season begins from September onwards. However, the weaker than expected monsoon this year has made agricultural output uncertain weighing down demand from the rural sector. Infrastructural projects undertaken by the Government should get reflected further in these numbers going ahead. Industrial growth would be in the region of 4% for the year, with an upward bias if investment and consumption takes off convincingly after September”.
However, Debopam Chaudhuri, Chief Economist, ZyFin Research is optimistic and says “ “This is a positive surprise with the general expectations being around 3.5%. Equally surprising is the upward revision in the June data, despite GDP data for June quarter indicating slowing economy. In Fact consumer durables grew by 11.4% in July as per the IIP estimates, which should augur well for an economy dominated by domestic spending. However with just about 50% of the industries posting a positive growth in July, there is a long way to go for Indian manufacturing to rebound.”
Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services holds a cautious view. According to him “IIP growth unexpectedly surged to 4.2% for Jul'15 from 4.4% in the previous month. However, the growth seems skewed as nearly 62.0% of the contribution in growth is from capital goods and gems & jewellery sector. Although, capital goods sector surged to 10.6% YoY, machinery and equipment- leading indicator of infrastructure activity declined to 2.4% YoY. Surge in capital goods sector might be attributable to increase in government spending. However, weak domestic and global conditions (as indicated by weak corporate sales and export growth respectively) continue to point towards sluggish IIP growth for the rest for the year”.
IIP. What does it indicate?
Industrial growth came at 4.2% in July and cumulated to 3.5% for the 4-months period. This is a good sign and does signal that growth could be in the region of 4% for the entire year considering that there is expectation that both investment and consumption would pick up in second half. The present set of numbers does reflect some pick up in production of capital goods and consumer goods, though the statistical base effect is pronounced for the latter. Some of the better performing industries are metals, engineering and automobiles.
Growth of 4% in capital goods on top of 8.7% in 2014 along with similar growth rates in basic goods (4.8%) does indicate that there could be some infra activity taking place due to government spending.