IIP growth in May highest in 19 months

Signals growth recovery if trend persists but experts note low base, caution on monsoon outcome

Industrial output in May grew by 4.7 per cent, the highest monthly rise since October 2012, giving further momentum to a 3.4 per cent rise in April and raising hope of a recovery.

The growth in October 2012 was 8.4 per cent, while industrial production had contracted 2.5 per cent in May last year. The fact that 4.7 per cent growth is the next highest since  the Index of Industrial Production (IIP) clocked 8.4 per cent growth itself shows the tepid performance in between.

Cumulative growth during April-May, the first two months of this financial year, was four per cent, against a fall in output by 0.5 per cent in the first  two months of 2013-14.

If the trend persists, it would contribute to the government's projection of a 5.4 per cent economic growth in 2014-15, after sub-five per cent in the previous two years. However, experts have doubts due to the possibility of a bad  monsoon and spiraling inflation.  

Experts said the rise was mainly due a low base-effect and some pick-up in mining activity and rise in the production of automobiles. Better demand conditions abroad contributed and exports rose 12 per cent in May.

“Improved merchandise trade contributed to the encouraging pick-up in the growth of IIP in May. However, some caution is warranted with regard to the sustainability, which came on the back of a benign base effect,” said Aditi Nayar, economist with ICRA India.

In the broad sectors of mining, manufacturing and electricity, the growth recorded in May was 2.7 per cent against 2.6 per cent in April, 4.8 per cent against 2.5 per cent and 6.3 per cent against 11.9 per cent, respectively.

In manufacturing, growth was not concentrated in capital goods, whose high but volatile numbers  sometimes push industrial  expansion. Capital goods rose only 4.5 per cent against double-digit growth in April.  Consumer durable goods grew 3.2 per cent in May, after months of contraction. Recovery in automobile sales contributed to this rise.  

Cumulatively, growth recorded in mining, manufacturing and electricity was 2.6 per cent in April-May this financial year against a decline in output by 4.7 per cent in the same months of 2013-14, a 3.7 per cent rise against a fall of 0.9 per cent, and nine per cent against 5.3 per cent, respectively.  

Nayar said while business sentiment was improving after the elections and it was expected that the proposals in the Budget would add to it, an unfavourable monsoon might “cast a cloud on consumer confidence, through channels such as low agricultural output and income growth in rural areas and high food inflation in urban areas”.

Within industry, production of furniture recorded the highest growth of 60 per cent in May, followed by 37.1 per cent growth in tobacco products and 33.7 per cent in electrical machinery.

According to D K Joshi of CRISIL, “We should not be much euphoric about the IIP numbers, as this comes on the back of 20-year low production in May 2013.

However, he said, it seems there is going to be some good news, provided the monsoon is not disastrous. "Nevertheless, this year is going to be much better than last year because in 2013-2014 we had gone very low; we cannot go lower than that.” Industrial  production contracted 0.1 per cent in 2013-14.

“As we move ahead, we expect a gradual revival in industrial growth. Based on the impetus provided in the Budget, we think a fresh leg of investments should give a push to industrial activity,” said Shubhada Rao of YES Bank.

The industry group that registered the highest fall was radio, TV, communication equipment and apparatus, contracting 40.3 per cent, followed by a 28.6 per cent fall in accounting and computing machinery and 7.4 per cent in motor vehicles, trailers & semi-trailers.

 

"As we move ahead, we expect a gradual revival in industrial growth. Based on the impetus provided in FY15 annual budget, we think a fresh leg of investments should give a push to industrial activity going forward," said Shubhada Rao of Yes Bank.