Manufacturing on a sound footing

The double-digit growth in IIP may moderate due to higher base and monetary tightening

After single-digit growth in June, the Index of Industrial Production (IIP) growth bounced back to double-digits (at 13.8 per cent) in July. These welcome numbers were higher than the analysts’ estimate of seven-eight per cent and proved a catalyst for the market’s sharp jump.

While July IIP growth remained broad-based, the manufacturing index’s steady 15 per cent growth provided the momentum. Among the use-based category, 63 per cent year-on year growth in capital goods and 22 per cent in consumer goods were pointers to a sound domestic economy. The demand scenario remains robust. Nevertheless, the growth in capital goods may be one-off and fall substantially in the coming months, while consumer goods may continue to grow.

With the festival season coming, growth in the manufacturing index may also continue, but is likely to taper off later. The higher base impact may moderate the year-on-year growth during the second half of the current financial year. Non-durables and intermediate goods, which have lead the headline index so far, have already started moderating. Inflation might have been the cause for sluggishness in non-durables, but the segment may see some uptick as inflation eases.

The effects of monetary tightening are also likely to be witnessed during the second half of the current financial year. Analysts at Edelweiss estimate a total hike of 25 basis points in repo rate and 50 basis points in reverse repo rate in September and November policy reviews.
 

GROWTH BOOST
	y-o-y (%)
	Jun ’10	Jul ’10
Industrial Production	5.8	13.8
Manufacturing	5.8	15.0
Mining	8.5	9.7
Electricity	3.5	3.7
Source: Edelweiss

Despite a strong domestic outlook, certain caution is still required on the global front. Pace of economic expansion has been a bit slow in the US, with growth revised down to 1.6 per cent in the June quarter from 2.4 per cent estimated earlier. In Europe, while Germany may have surprised on positives, the rest of the continent continues to struggle. The renewed widening in European bond spreads indicates that the European debt problems persist. In Asia, the softening of PMI indices in China, South Korea, Taiwan and Singapore indicates that the industry momentum is moderating. Edelweiss analysts caution that these trends will influence India through trade, capital flow and the sentiments channel.

For the full year, India’s gross domestic product growth is pegged at 8.2 per cent by analysts at Ambit capital, while industrial growth is estimated at 9.5 per cent.