Business Standard

Capital goods propel IIP growth to 8.8%

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BS Reporter New Delhi

A high interest rate regime notwithstanding, industrial production posted 8.8 per cent growth in June from 5.9 per cent in May. However, much of the growth was accounted for by the capital goods sector, considered volatile by economists.

After months, industrial growth, as estimated by the index of industrial production (IIP), was higher than the figure of 7.4 per cent for the same month last year. Outside the capital goods sector, industrial growth was low at 3.8 per cent. Economists doubt whether close to nine per cent industrial growth can be sustained at a time of high interest rates and slackening demand overseas.

 

On the other hand, the numbers are in line with the high export growth and tax collection figures. The government is upbeat at the IIP numbers, which showed that manufacturing (constituting 75 per cent of the index) expanded in double digits after a slowdown for several months. “It is encouraging. If this trend continues, it will give a boost to growth,” Finance Minister Pranab Mukherjee said. Planning Commission Deputy Chairman Montek Singh Ahluwalia said, “I think it is broadly along the lines we have been talking about for the current year.”

RBI Deputy Governor Subir Gokarn said, “In the policy statement in July, we were seeing growth moderating, but it was not broad-based. This number validates that view. We are tracking other indicators as well like the first-quarter results and credit flow. The decision on a rate hike would be based on all inputs; one number won’t be decisive.”

“The recent strength in IIP paints a mixed picture for overall economic growth. With inflation likely to remain above 9 per cent for the next few months, we expect the RBI to raise the policy rate 25 bps in its upcoming mid-quarter review in September,” said YES Bank chief economist Shubhada Rao.

Rajeev Malik, senior economist, CLSA, said the RBI would dig into the IIP details and was unlikely to be influenced only by the headline number.

The huge capital surge was led by electrical machinery and apparatus, which jumped 88.9 per cent in June.

Consumer durables growth was just one per cent against 21.2 per cent a year ago. The intermediate goods sector expanded just 1.9 per cent from 8.5 per cent. Basic goods were, however, up 7.5 per cent against 3.7 per cent a year ago.

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First Published: Aug 13 2011 | 12:21 AM IST

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