Though numbers are lower than consensus, analysts see no reason to panic.
The wild month-on-month (m-o-m) swings in industrial activity, as reflected in the readings of the Index for Industrial Production (IIP), seem to continue, despite the introduction of a new series. The series was introduced in June to reflect the recent production behavior and iron out monthly volatility in readings. However, that does not seem to have happened. Growth in India’s factory output plummeted to 3.3 per cent year-on-year in July from 8.7 per cent and 5.9 per cent in June and May, respectively. This figure is well below the consensus estimate of 6.2 per cent.
If taken at face value, IIP growth has crashed to 3.3 per cent, thanks to the slow pace of growth of the capital goods sector. In July, the sector contracted by 15.2 per cent, compared to 38.2 per cent in June and 40.7 per cent in the month a year ago.
According to Leif Eskesen of HSBC Global Research, even as numbers are lower than consensus, there is no reason to panic. He says, “The reason we hold on to this view is that the deceleration in industrial production growth was, to a large extent, driven by the volatile capital goods segment, which jumped by 38 per cent y-o-y in June and also faced a high base in July last year, when output rose by more than 40 per cent y-o-y.”
Economists say one should not read too much into this as there seems to be some problem in collecting data, because nothing else can explain such a wild m-o-m swing. A better way to gauge India’s factory output is to look at the three-month moving average rate of growth, they say. It stands at six per cent now, compared to 8.6 per cent last year and 6.8 per cent till last month, explains Ashutosh Datar, economist at IndiaInfoline.
A three-month moving average of six per cent suggests factory output has decelerated, but not crashed. If you weed out this volatility, growth is actually holding up reasonably well. Industrial production, ex-capital goods, expanded 1.6 per cent m-o-m, albeit after a string of small m-o-m declines over the last few months, says Credit Suisse.
Undoubtedly, industrial activity is slowing. But, on the positive side, 15 of the 22 industries have recorded positive growth and, at 8.7 per cent, June IIP numbers have remained unchanged. While intermediate goods (textiles) also declined by 1.1 per cent, consumer goods picked pace and grew 6.3 per cent in July from 2.3 per cent in June.
Despite this, downside risks emanating from external factors remain.