Deteriorating IIP numbers and inflation a key concern
Despite the new series taking 2004-05 as the base year as against the earlier base of 1993-94, IIP continues to show volatility.
By Pooja Suri, | Updated:
The index of industrial production growth decelerated to 5.6% in May 2011 compared with that of 5.8% YoY in April 2011 and 8.8% YoY in March 2011. The IIP growth in May was much below consensus forecasts of 8% plus. In the manufacturing segment, growth decelerated to 5.6 per cent YoY vs. 6.3% YoY in April. While growth in the electricity segment picked up to 10.3% YoY vs. 6.5% in April, it remained unchanged in the mining segment at 1.4% YoY vs. 1.3% YoY in April.
Despite the new series taking 2004-05 as the base year as against the earlier base of 1993-94, IIP continues to show volatility. Though the number of items in the IIP has been expanded, the coverage leaves much to be desired.
Industrial production has slowed down due to the slump in the capital goods output. According to the use-based classification, capital goods, intermediate goods and consumer durables sectors have seen the maximum contraction in growth from last year, while basic and consumer nondurables sub-sectors have done slightly better than last year. This shows that IIP growth will continue to remain weak and volatile depending on the performance of the capital goods sector.
Inflation in the economy is inching towards double digits. WPI Inflation for the month of June was at 9.44% up by 38bps from 9.06% in May. However the inflation rate only partially captures the impact of the diesel price hike which was implemented on June 24. The July inflation is expected to be closer to 10% thus reflecting the impact of this price hike. It is believed that the RBI will continue its anti – inflationary measures and hike interest rates by at least 25 bps at its quarterly review on July 26.
The capital goods sector not showing any significant improvement in the IIP shows a lack of fruitful investment demand. The rapid increase in the interest rates due to the high inflation has hit investment hard and it was suggested that the RBI refrain from hiking interest rates in its review on July 26. However, finance minister Pranab Mukherjee expressed concern but played down the figures by saying that one – month figures cannot be taken as a trend.
While these figures have been just for one month it cannot be denied that the situation has to be monitored closely especially due to the pressured inflation situation that the government faces at the moment.
Despite the new series taking 2004-05 as the base year as against the earlier base of 1993-94, IIP continues to show volatility. Though the number of items in the IIP has been expanded, the coverage leaves much to be desired.
Industrial production has slowed down due to the slump in the capital goods output. According to the use-based classification, capital goods, intermediate goods and consumer durables sectors have seen the maximum contraction in growth from last year, while basic and consumer nondurables sub-sectors have done slightly better than last year. This shows that IIP growth will continue to remain weak and volatile depending on the performance of the capital goods sector.
Inflation in the economy is inching towards double digits. WPI Inflation for the month of June was at 9.44% up by 38bps from 9.06% in May. However the inflation rate only partially captures the impact of the diesel price hike which was implemented on June 24. The July inflation is expected to be closer to 10% thus reflecting the impact of this price hike. It is believed that the RBI will continue its anti – inflationary measures and hike interest rates by at least 25 bps at its quarterly review on July 26.
The capital goods sector not showing any significant improvement in the IIP shows a lack of fruitful investment demand. The rapid increase in the interest rates due to the high inflation has hit investment hard and it was suggested that the RBI refrain from hiking interest rates in its review on July 26. However, finance minister Pranab Mukherjee expressed concern but played down the figures by saying that one – month figures cannot be taken as a trend.
While these figures have been just for one month it cannot be denied that the situation has to be monitored closely especially due to the pressured inflation situation that the government faces at the moment.
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