December IIP at 1.8%: True Reflection of Economic Growth

After registering a 5.94% (revised) growth in the month of Nov 2011, the IIP growth for Dec 2011 has dipped to 1.8% on the back of the contraction seen in the Capital Goods and Mining sectors along with weakness in the Manufacturing sector.

At the time of reporting the Nov 2011 IIP (November IIP shows signs of economic recovery), we, at DSIJ, had predicted that the Dec 2011 IIP data would dip southwards, showing a more realistic picture of the country’s economic activity. This, coupled with the recently released advance GDP growth estimates at 6.9%, gives a fair view of the persistent sluggishness in the Indian economy.

Though expected, the markets took this as an opportunity to book some profits off the table and keep cash in hand to invest at cheaper valuations. The Sensex ended its trading session at 17748.69 on Friday, Feb 10, 2012, 0.45% below its previous closing price.

As already mentioned, the decline in industrial production for Dec 2011 was due to the dismal performance by the Capital Goods, Mining and Manufacturing sectors. Manufacturing output growth, which constitutes about 76% of the total industrial production, softened to 1.8% in the month as compared to 6.6% a month earlier. The contraction in Capital Goods’ output at -16.5% in Dec 2011 as compared to a healthy 20.2% expansion during the same period in 2010 highlights that there is a sustained weakness in investment activity this fiscal.

Regulatory hurdles, the ban on iron ore mining in some states and excessive rainfall in the regions with major coalfields have impinged on the mining sector’s output, which continues to report negative growth at -3.7% for Dec 2011 as against 5.9% in Dec 2010.

In conclusion, we expect this muted IIP growth performance to persist further into Q4 FY12. A true reflection of this can be seen in the government’s advance GDP estimates for FY12, which pegs industrial output to grow at merely 3.9% for this fiscal. With the current 9-months IIP output lagging at 3.6%, the growth to the upside is very limited.

Having said all this, the contraction in economic growth may prompt the RBI to contemplate the idea of a cut in interest rates during its next monetary policy review in Mar 2012.