Knowledge Quotient

Industrial Production growth moves to single digit at 7.1% in June on high base.

Industrial production in June, as expected, registered a single digit growth of 7.1% yoy, lower than consensus estimate of 8.3%, primarily due to high base. But sequential month over month IIP data (seasonally adjusted) actually moved up by around 2%.

Manufacturing softens on annual basis on high base:

Manufacturing output, with higher weightage in IIP, rose by 7.3% yoy in June vs 12% in May. Within manufacturing, as many as 13 out of 17 industry groups showed positive growth. ‘Metal Products/Parts’ (+62%) had the highest growth, followed by ‘Jute, Veg Fibre Textile’ (+30%) and ‘Transport Equipment’ (24.6%) (see table in next page) indicating that sectors other than auto, construction and machinery are slowly driving growth. Manufacturing grew at 0.6% m/m in June vs -0.9% in May.
Mining grew at 9.5% yoy in June compared to 10.1% in May. Electricity increased at 3.5% yoy in June vs 6.4% in May. On month over month basis, both mining and electricity declined by -1.6% and -3.8% respectively.

Within Use-based classification, Capital goods remained strong on sequential basis but slowed on annual basis due to high base:

The consumer goods grew at 8.3% yoy in June vs 7.4% yoy in May as consumer durables and consumer nondurables both remained strong at 27.4% and 1.3% in June vs 23.7% and 1.4% in May
Basic and intermediate goods production, associated with inventories, grew at 3.4% and 8.7% in June respectively vs 8.2% and 10.1% respectively in May. On month over month basis, both declined, that does not bode well for capital goods.
Capital goods, indicating fixed capital investment, remained volatile and declined significantly to 9.7% yoy in June from 34.2% in May due to high base. On month over month basis, it went up robustly by 6.3%.

Bottom Line:

It was actually encouraging to see IIP data move up on monthly basis in June. In MoM terms, the seasonally adjusted estimates show that the IIP had remained flat since Jan'10.
Going forward, IIP on YoY basis will remain in single digit due to both high base effect and slower momentum compared to that during the recovery phase.
Anecdotal evidences indicate that consumption demand has remained strong as also seen in passenger car sales. Part of the hindrance to growth had been capacity constraints. Sectors that have witnessed capacity constraint include auto, steel and consumer goods. Power sector has been supply constraint for years now.
Industrial production growth is becoming more broad-based. On month over month basis, IIP will start to rise but at a slower pace.
If RBI decides to hike rate again in Sept by 25 bps, it will go at slower pace for rest of the year on uncertain global outlook.

Economy Update

IIP growth in Jun'10

The year over year growth of IIP

The month over month growth of IIP

Sectoral growth rates (%, y-o-y) within Manufacturing

13 out of 17 industry groups showed positive growth.
What lags? : 'Leather and Fun Products' declined by 9.9% followed by 'Wood and Wood Products' (-7.0%), 'Beverages, Tobacco Products' (-2.2%) and ‘Basic Metal and Alloy' (-0.5%).

IIP – in Charts

June IIP below consensus but actually increases a bit month over month

Industrial production started the current fiscal year with bang and grew at 16.4% in Apr’10 (Apr’09: 1.2%) on the back of robust capital goods and consumer durables sector growth.
June IIP at 7.1% was below consensus expectation of around 8.3%.
On month over month basis, IIP actually moved up.

At 3.4%, June core sector growth at lowest pace in 10 months.
Index of six core-infrastructure industries having a combined weight of 26.7% in IIP logged 3.4% in June

Crude oil production improved on low base. Electricity, Coal, Steel and Cement sectors disappointed.

Non-oil imports moved down a bit; Credit growth improved significantly on 3G outflows.

Manufacturing, the big boy of IIP with 79% weightage, moves down to 7.3% yoy in June.

Consumer Durables and Non-Durables remain strong in June.

Capital goods growth decline sharply to 9.7% in June from 34.2% in May.

Appendix

Use - Based Classification: Top 15 Components by Weight
Component	Wt (%)
Basic Goods	35.6
Mineral index	10.5
Electricity	10.2
Cement all kinds	2.0
Nitrogenous fertilizers	1.8
Bars and rods	1.8
Carbon steel	1.1
Structural (light, medium & heavy)	1.0
High speed diesel	0.7
Caustic soda	0.5
Soda ash	0.4
Aluminium ingots	0.4
Pig iron	0.3
Phosphatic fertilizers	0.3
Sponge iron	0.2
Plates	0 2

Capital Goods	9.3
Diesel engines (IPP)	0.8
Well/off shore platforms	0.7
Industrial machinery	0.5
Complete tractors	0.5
Laboratory and scientific instruments	0.4
Protection system/switch board/switch gear etc.	0.4
Computer system and its peripherals	0.4
Process control instruments	0.3
Ship building and repair	0.3
Agricultural implements	0.3
Power & dist. transformers (IPP)	0.3
Broad gauge passenger carriage	0.3
Textile machinery	0.3
Telecommunication cables	0.3
Insulated cables/wires all kinds	0.2

Intermediate Goods	26.5
Cotton yarn (including SSI)	4.5
Filament yarn	1.8
Plywood commercial	1.7
PVC pipes & tubes	1.5
Particle board	1.0
Glazed tiles/ceramic tiles	0.9
Auto ancillary & parts	0.7
Polyester fibre	0.7
Shoe uppers	0.6
Paints, enamels & varnishes (IPP)	0.5
Viscose staple fibre	0.5
Corrugated boxes/cartons (all kinds)	0.5
Ball& roller bearings	0.5
Newsprint bleached	0.5
Bottles/bottle glass wares	0.4

Consumer Durables	5.4
Telephone instruments	0.6
Scooter and mopeds	0.6
T.V. receivers	0.5
Passenger cars	0.4
Giant tyres	0.4
Wrist watches	0.4
Motorcycles	0.4
Bicycles all kinds	0.4
Alarm time pieces	0.3
Electric fans all kinds (IPP)	0.2
Washing/laundry machines etc.	0 2
Metallic utensils excl. pressure cooker	0.2
Refrigerators (domestic)	0.1
A.C. single phase house service meters	0.1
Two wheeler tyres	0.1

Consumer Non-durables	23.3
Cotton hosiery cloth	2.5
Sugar	2.2
Wheat flour/maida	2.1
Paper & paper board (IPP)	1.4
100% Non-cotton cloth	1.2
Vitamin a	1.1
Milk powder of all kinds	1.0
Cotton cloth (excluding hosiery)	1.0
Cigarettes	0.8
Tea	0.8
Vitamin c	0.6
Ampicillin	0.6
Mustard oil/rape seed oil	0.5
Indian made foreign liquor	0.5
Writing Instruments	0.4

Total Used Based Index	100

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