Lower IIP does not signal a slowdown, but there are a few factors that may turn into concerns.
The Index of Industrial Production (IIP) grew 11.5 per cent in May, much lower than the median estimate of 16 per cent on the Street. The April IIP numbers, which came in at 17.6 per cent, were also revised downwards to 16.5 per cent. The lower-than-expected performance is not discouraging, but it raises some concerns.
The rate had to moderate and was expected to consolidate at lower levels, reckon economists. An analysis of the bull-cycle from FY04 to FY08 showed the growth level at around 8.7 per cent. Also, the industrial growth has been in the double-digit zone for the past eight months and it will be challenging to sustain it. Rather, a more realistic single-digit number is expected in the coming months. On the positive side, this will enable policymakers to take clearer steps and set the direction for growth and price stability.
Economists at Edelweiss Securities reckon, “The current number supports our view of absence of any generalised demand overheating in the economy,” which is another positive. Numbers are expected to cool down in the coming months. Already, month-on-month variations in sectors like manufacturing, capital goods and consumer durables have been quite sharp. Also, with the base turning more stable, the capital goods sector is likely to record lower numbers.
The concern is that most units are running at high-capacity utilisation and the inventory re-stocking has taken place. With input costs rising, price rises and lower growth – a completely unwanted situation – could be a reality. There are projects worth Rs 1,16,000 crore lined up for implementation, with Rs 5,800-crore worth new projects already being added in the June quarter. Availability of funding for these will be crucial. Hence, the key word will be execution. Till these projects come onstream, some choppiness is expected. Cement and electricity sectors will be watched closely, as projects here will come onstream in the next two quarters.
