After showing a healthy growth of 13.8% in July, IIP figures for the month of August dampened the spirits of investors and this was evident by a decline in the benchmark indices. The industrial growth rate slowed down to 5.6% in August from 10.6% in the corresponding period last year, much below expectations. Among the main industry segments, manufacturing activity declined to 5.9% from 10.6% a year ago. Mining sector growth stands at 7% as compared to 11% in August last year. Electricity generation growth had a drastic fall from 10.6% last year to just 1% this year. Expectations were set quite high for the Capital goods sector. But, it too disappointed by showing a negative growth. The sector reported a negative growth of 2.6% whereas a year ago it grew by an impressive 9.2%. FMCG space too, recorded a negative growth of 1.2%, in comparison to an expansion of 6.1% last year. Out of the 17 industry groups, 14 have shown positive growth during the month of August. The core sector which comprises of crude oil, petroleum refinery products, coal, electricity, cement and finished steel accounts for 26.7% of total industrial output. This space grew by 3.7%, again a slowdown in growth. The industry group metal products and parts, except machinery and equipment have shown the highest growth of 33.4%, followed by 27.9% in other manufacturing industries and 22.8% in transport equipment and parts.
The data appears to be quite volatile majorly because of the performance in capital goods sector. Though the monthly numbers are volatile, the cumulative numbers give some relief. The average growth in industrial production during April-Aug 2010 stands at a strong level of 10.6%, nearly two times the growth seen in the same period last year. If the IIP number remains the range of 7-9% for the remaining fiscal, the average industrial growth over FY11 would come out to around the level of 9%, minimum requirement to reach to the projected GDP growth of 8.5% for the fiscal. Also a very heavy monsoon in August and September too would have played a spoilsport as a lot of construction activity got stalled due to flooding and heavy deluge in various parts of the country. This is likely to get corrected going forward.
On the whole though the numbers look disappointing yet this could be a one month aberration. We will need to wait for more indicators including quarterly result figures which start from this week itself as well as IIP numbers of September and October before concluding whether a slowdown has actually set in. For the moment it would be fair to assume that the growth momentum will continue and we recommend investors to remain invested and use declines to increase exposure to stocks. However at the same time watch out for all the important indicators – economic and corporate coming out in the next couple of months for reconfirming sustenance of economic growth momentum going forward.
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