> IIP growth declines to 1.8% in December 2011

In December 2011 the Index of Industrial Production (IIP) grew by 1.8%, which is a tad lower than the market’s expectations. The relatively subdued performance was led by a weak performance in the manufacturing sector and a sharp decline in the capital goods sector. On a year till date (YTD) basis, the IIP growth stands at 3.6% as against 8.3% in the corresponding period of FY2011.


On a sequential basis (month on month), the IIP index expanded by 6.8% in December 2011 to an absolute figure of 178.8 as compared to 167.4 in November 2011. On a sequential basis also, the growth in the consumer goods segment was quite strong at 12.1% led by a strong growth in the non durable goods, though the capital goods segment grew by a muted 1.6% sequentially. The mining sector declined by 3.7% as against a decline of 4.4% seen in November 2011 whereas the manufacturing output grew by 1.8% as against a decline of 6.6% in November 2011. The electricity sector saw a growth of 1.8% year on year (YoY) as against a growth of 14.6% recorded in November 2011.


After showing some recovery in November, the IIP growth has dipped in December on account of subdued growth in the capital goods segment. Going ahead we expect the IIP numbers to remain subdued due to a general slowdown in the economy as high interest rates have slowed investments. In its Q3 monetary policy review, the Reserve Bank of India (RBI) has already reduced the cash reserve ratio (CRR) by 50bps and indicated at a reduction in policy rates based on the inflation trend and fiscal deficit situation. Going ahead, the softening of IIP and gross domestic product (GDP) growth could build a case for reduction in repo rates by the RBI in the March mid-quarter policy review.




Sluggish growth in manufacturing sector
In December 2011 the manufacturing sector showed a growth of 1.8% YoY as against a growth of 5.9% seen in November 2011. In absolute numbers, the manufacturing sector index was reported at 190.7 as against 177.8 in the previous month and the mining sector saw a decline of 3.7% as against a drop of 4.4% in November 2011. The electricity sector witnessed a growth of 1.8% as against an increase of 14.6% in November 2011. In terms of industries, 5 out of 22 industry groups showed a decline during December 2011 as compared to 6 out of 22 in November 2011.


IIP for November 2011 remains unchanged at 5.9%
The IIP growth number for November 2011 has remained unchanged at 5.9%. From a segmental perspective, the mining growth has been revised upwards to -4.1% from the provisional figure of -4.4% and the capital goods growth has been revised upwards from -4.6% to -4.3%.




Outlook
After showing some recovery in November, the IIP growth has dipped in December on account of subdued growth in the capital goods segment. Going ahead we expect the IIP numbers to remain subdued due to the general slowdown in the economy as high interest rates have slowed investments. In its Q3 monetary policy review the RBI has already reduced the CRR by 50bps and indicated at a reduction in policy rates based on the inflation trend and fiscal deficit situation. Going ahead, the softening of IIP and GDP growth could build a case for reduction in repo rates by the RBI in the March mid-quarter policy review.


RISH TRADER