June IIP shocks at -1.8%, capital goods sector contracts -27.9%

NEW DELHI: The index of industrial production for the month of June contracted at a shocking (-) 1.8 per cent versus 2.5 per cent in the month of May. This is much below the ET Now consensus poll estimates of 0.9 per cent. The capital goods sector has witnessed a sharp contraction of (-) 27.9%.

The output for May was revised to 2.5 per cent from 2.4 per cent. The contraction provided further ammunition to the slew of private economists who downgraded their growth outlook for India this week, citing a worsening drought and political hurdles to economic reform.

Industrial output shrank, driven down by a deep dip in manufacturing.

The manufacturing sector of the economy contracted at (-) 3.2 per cent in the month of June versus a growth of 2.5 per cent in May. The mining sector has exhibited a growth of 0.6 per cent versus (-) 0.9 per cent in May. While the non-durable goods sector has contracted at (-) 0.1 per cent versus 0.1 per cent growth in May, the consumer-durable goods sector grew at 9.1 per cent versus 9.3 per cent.

The electricity sector grew at a robust 8.8 per cent versus 5.9 per cent in May. Industrial production has contracted by 0.1% in the first quarter as against a growth of 6.9% a year ago. The IIP for the month of June last year stood at a robust 9.5%.

At a time when the Reserve Bank of India ( RBI) is increasingly coming under pressure from India Inc to cut rates, there are hopes that the IIP numbers will provide some policy direction.

In its monetary policy review last month the RBI had maintained that controlling inflationary pressures remains a priority. However, Reserve Bank of India has scope to cut interest rates during this calendar year, Governor Duvvuri Subbarao had said.

Last month, RBI left interest rates unchanged citing inflationary pressures, but cut the statutory liquidity ratio by a percentage point to 23% to increase the flow of credit to industry.

RBI kept its policy repo rate at 8 per cent and left the cash reserve ratio for banks at 4.75 per cent. CRR is the share of deposits banks must keep with the RBI.

In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," RBI Governor Duvvuri Subbarao wrote in the monetary policy review, adding the central bank's primary focus remains inflation control.