June IIP Declines By 1.8%

Country’s industrial production measured as the index of industrial production (IIP), contracted by 1.8 per cent for the month of June 2012. This has come against the market expectation of 1% growth. The May 2012 figures have also been revised form 2.4% to 2.5%.

The numbers do not provide any cues as to where the economy is heading.  The IIP numbers in April 2012 were -0.9% while that in May 2012 were 2.5%. Overall the April- June 2012 quarter has seen a contraction of 0.1% showing that the Industrial production has tumbled due to the global slowdown as well as the domestic factors such as high interest rates and persistent inflation.

The manufacturing sector for June 2012 saw a contraction of 3.2% while the mining sector saw a minute expansion of 0.6%. The electricity sector however has shown a robust growth of 8.8% during this period which is higher than 5.9% seen in the May 2012.

Of the 22 industry groups, a total fourteen industries have witnessed non-negative growth in the production. This includes the industries such as watches, clocks, publishing, printing etc. The Electric Machinery and apparatus sector has witnessed a decline of 56% while food products and beverages and tobacco products have also witnessed a decline during the month.

Capital goods have continued to be laggard in growth. For the month of June 2012, the sector has seen a decline of 27.9% while that for the period of April –June 2012 it is 19.6%.

With the negative IIP numbers, RBI may again come under pressure to cut the rates. In the monetary policy review last month, RBI kept the key policy rates unchanged while cut the SLR by 100 basis points.

Market is expecting new finance minister P Chidambaram to revive the growth of the country and he has also set up a new plan for the same. As the inflation has got revised upwardly for the month of May 2012 any rate cut hope form here takes a back seat. RBI has made clear that the current inflation is way higher than its comfort zone hence we believe that markets will eye the reforms if at all they are taken by the government.

All eyes are set on the WPI data due to be announced in the next week. We expect some spike in the inflation due to poor monsoon.

From the IIP data it is clear that the growth has completely been affected. Though there is need for the RBI to cut the interest rate, we will have to wait for some time due to the high inflation.