Capital goods slow IIP growth to 5.6% in Aug

Factory output fell to a 15-month low in August due to a slowdown in manufacturing, particularly the capital goods segment. The latest data released by the government on Tuesday estimated 5.6 per cent growth in the index of industrial production (IIP).

In August 2009, industrial growth had entered double-digit levels at 10.6 per cent for the first time since the September 2008 global meltdown. At the same time, the government revised upwards the estimate for July to 15.2 per cent from the provisional 13.8 per cent.

Manufacturing, which accounts for a 79.4 per cent share in the index, grew at an estimated 5.9 per cent in August, compared with 10.6 per cent a year earlier. And if capital goods was the driving force behind July’s high growth, it was also responsible for dragging down growth in August.

The month saw a 2.6 per cent decline in capital goods output. At 72 per cent growth in July, the segment, with a weight of 9.26 per cent in the index, was the main contributor to the unexpected spurt in the overall figures the previous month.

The fortunes of the capital goods segment have been largely influenced by the cable wire industry, which registered an over 200 per cent rise in July and followed it up with a decline in August.

Overall industrial growth was far below economists’ expectations, and even Finance Minister Pranab Mukherjee expressed disappointment. “(The trend is) a little disappointing. Let us see how it fares in annualised terms,” Mukherjee told reporters.

“The numbers are much lower than even the most pessimistic expectations. This, after a month of spectacular growth. We should take the figures with a pinch of salt and see other indicators,” said HDFC Bank Chief Economist Abheek Barua.
 

WEIGHED DOWN CATEGORY GROWTH  (%)
	Mining	Manufacturing	Electricity
Apr	11.97	16.40	6.90
May	9.95	12.20	6.41
Jun	8.50	5.80	3.50
Jul	9.90	16.70	3.70
Aug	7.04	5.90	1.02

“The August reading of IIP suggests that the big July spike was a blip in the volatile data. It provides another pointer that domestic demand is not accelerating, although a host of other indicators such as auto sales suggest demand remains robust. A better-than-expected monsoon will help sustain demand,” Goldman Sachs economist Tushar Poddar said in a note.

Economists, however, said Reserve Bank of India would continue with monetary tightening, as inflation – the central bank’s primary concern -- has remained high. RBI Governor D Subbarao refused to comment on the data in the afternoon, saying he had not studied it.

Subbarao had recently said the IIP growth numbers were irregular and volatile. The headline measure of industrial output has fluctuated since May 2010. “The recent volatility in IIP is undermining its usefulness as a measure to gauge broader economic activity and, hence, in determining the policy prescription for near-time macroeconomic management,” said Matt Robinson, senior economist with Moody’s Analytics in a research note.

Growth in three categories of mining, manufacturing and electricity saw decelerations both on an annual and month-on-month basis. Manufacturing saw the sharpest dip, at 5.9 per cent, in August, from 16.7 per cent in July. Growth in mining and electricity stood at 7 per cent and 1.02 per cent, respectively, compared with 9.9 per cent and 3.7 per cent in the previous month.

Economists said monetary tightening was one reason for the deceleration, although they were quick to add that the estimates were below their estimates. “In the light of these figures, RBI should pause monetary policy tightening. In fact, it should have waited for the numbers before hiking rates last month,” said Veena Mishra, chief economist with the Mahindra group.

Barua also sees the capital goods sector running out of steam, particularly the automobile and ancillary segment, which had kept growth high. “I suspect a slowdown in the second half, as sectors like automobiles are seeing some degree of fatigue. Industrial growth is also not broad-based enough,” Barua added.

Besides, the statistical base effect is also expected to pull growth down, as industrial production had gathered momentum in the second half of last financial year.

However, September and October are expected to see sustained growth, as companies build up inventories to meet festival-season demand. Also, the adverse impact of the monsoon on industrial activity, felt in August, will wane in coming months. Most are pegging average IIP growth for the fiscal at 8-9 per cent.

The volatility in capital goods was reflected in the machinery and equipment sector, which decelerated to 0.4 per cent from 57 per cent in the previous month. “Apart from volatility in capital goods, trends in use-based data were largely unchanged, with consumer goods up 6.9 per cent, led by durables at 26.5 per cent, while non-durables remained lacklustre at -1.2 per cent,” said Rohini Malkani and Anushka Shah, economists with Citigroup in a research note.

Growth in basic and intermediate goods stood at 3.7 per cent and 10 per cent, respectively, during the month, broadly in line with recent trends.