The Index of Industrial Production (IIP) plunged to 3.3 per cent in July, from eight per cent in July last year. As the consensus estimate of the IIP growth was 6.2 per cent (year-on-year), the weak growth figures impacted the Sensex on Monday. The BSE benchmark index closed 365 points lower than its previous close.
According to analysts, in the coming few months industrial production will remain subdued and inflation will remain high. To contain this inflation, they feel that the Reserve Bank of India is likely to introduce a final 25 bps hike.
“There are clear signs of activity slowing down in the domestic economy on top of an increasing risk of a global recession staring in our face. The June IIP number is thus an outlier in a general trend of slowing industrial activity – in line with the PMI numbers,” said Mr Jay Shankar, Chief Economist - Director, Religare Capital Markets Ltd.
The steepest fall was in the capital goods sector where the growth slowed down from 40.7 per cent last year to 15.2 per cent in July. The manufacturing sector which has the highest weightage of around 75 per cent in the IIP faced a considerable slowdown. Growth in the sector slowed down from 10.3 per cent in June to 2.3 per cent in July.
However, there was robust growth in the consumer durables sector which witnessed a rise from 1.5 per cent in June to 8.6 percent in July. “This is slightly surprising given a 15 per cent year-on-year fall in passenger car sales growth. This seems to suggest that consumption of other goods such as refrigerators, air conditioners, etc remains fairly strong,” said Ms Deepali Bhargava, Analyst, Esipirto Santo India Research.
The mining sector grew by only 1.7 per cent over the last month (June); analysts feel that the reasons for this could be the result of continued Government actions against illegal mining and slow environmental clearances.
As far as year-on-year figures are concerned, the electricity sector grew from 3.7 per cent in July 2010 to 13.1 per cent in July this year. Even the basic goods sector grew from 4.5 per cent last year to 10 per cent this year.
“The Wholesale Price Index (WPI) inflation has remained above 9 per cent for the last eight months and averaged 9.3 per cent in the last 12 months, despite the series of 11 rate hikes. Headline inflation in August (due Wednesday) is likely to remain at a 13-month high of 9.7 per cent,” said Mr Shankar.