IIP: Strong growth but pace moderating

While actual numbers continue to be strong, growth is moderating and should dip further as base effect cramp numbers and rising rates dampen environment
 
The index of Industrial production (IIP) continued to grow at a healthy pace of 13.5% y-o-y in March 2010 and 10.4% y-o-y for FY10, as per CSO release. However, the numbers for the month of March were marginally below street estimates and in step with a moderating trend after peaking in December 2009 at 17.6%.
 
The low base effect which has boosted numbers statistically will wear off from May 2010 and although industrial growth is expected to continue to be strong, index growth is expected to moderate to single digit from thereon, as per an Anand Rathi research report.
 
On a sectoral basis, manufacturing sector grew at over 14% y-o-y and mining at 11% y-o-y while electricity showed more moderate growth at 7.7% y-o-y in March 2010. In FY10 mining, manufacturing and electricity production grew by about 10%, 11% and 6% respectively over the previous year.
 
As per the use-based classification, in the month of March 2010, capital goods and consumer durables continued to post very strong growth of 27% and 32% y-o-y respectively adding to the robust growth of 19% and 26% y-o-y for FY10.
 
Intermediate goods production grew by about 13% in March 2010 and 14% in FY10 and basic goods, which make up about 36% of the index, grew by 10% in March 2010 and 7% in FY10 and the only drag was consumer non durables which showed flattish growth of 1.5% in FY10. The composite picture indicates a strong investment and consumption environment according to Ambit Capital research.
 
The road ahead
 
While the significant growth in capital goods will support overall IIP going forward, the rising interest rates could have a moderating effect on private investment, especially in the second half of FY11 according to Yashika Singh, Head Economic Analysis, D & B India who adds that persistently high input costs could also impact industrial production.
 
Industrial production is expected to adjust to a lower growth trajectory, according to Ambit research and as this will bring the growth versus inflation trade-off back into focus, Ambit expects the RBI to further study inflation risks before any monetary policy actions.  
 
Anand Rathi expects only moderate tightening this year, going ahead, with no mid-policy action in the face of the government’s large borrowing program and given a likely softening inflationary trend as the base adjusts upwards, while IIP growth also moderates going ahead. The recent crisis in some European countries could also have significant bearing on monetary policy formation in coming months, points out Singh of D &B India.