IIP numbers.....again a disappointment.

India's industrial space cooled down sharply in the month of September with the growth in the index of industrial production (IIP) sliding to 4.4%, way below the expectations of around 7%. Slight slowdown was expected going into second half of the fiscal owing to base effect from last year and weakening impact of fiscal stimulus. But the actual slowdown is a cause of major concern.

All the constituents of IIP showed significant downturn in the month under review. Manufacturing sector registered a growth of 5.5% compared with 5.9% in the previous month and 8.3% in the same month a year ago. Electricity was another under-performer with a growth of just 1.7% against 7.5% in the year-ago period. Mining activity managed expansion of 5.2% against 7.2% in the year-ago period.  Consumer goods, a strong driver of the industrial activity, decelerated to 5.2% compared with 9.1% in the same month last year. The pace of consumer goods expansion was even lower than last month's figure of 6.9% on the back of high inflation. Capital goods, which has been very volatile over last several months and responsible for most of the sharp swings seen in the IIP in recent months contracted by 4.2% (y-o-y) compared with a growth of 7.9% seen in the same month a year ago. In the previous month too, it was capital goods which had dragged down the IIP number with a contraction of 2.6%. The segment had seen growth of whopping 63% in July 2010. However, the September figure looks like a bit of a deviation and average growth in the IIP in second half of the fiscal may still come out to be around 7%.

The Reserve Bank of India recently raised key borrowing and lending rates, a total of six times so far this year in order to keep a tight reign on rising inflation. The central bank had stated that it may refrain from raising interest rates in the next three months. This tightening of monetary policy by the RBI will have its impact on investment plans, and will also improve medium term prospects of the manufacturing space by cooling down inflation by the end of the current fiscal.

While two consecutive months of slow down in the IIP numbers are certainly a cause of worry we don’t necessarily feel like raising a red flag at the current stage.  We think that IIP is just one of the indicators which have to be combined with industry and other economic like cement dispatches, automobile sales etc. Since other indicators have all been positive so far, we take the negativity in the IIP indicators as only a signal to get cautious and not alarmed. Therefore, we advise investors to hold on to their investments while keeping track of forthcoming economic indicators.