Industrial growth lags in latest sign of slowdown

Industrial growth lags in latest sign of slowdown

New Delhi: The index of industrial production (IIP) moderated to 5.6% in May from 5.7% a month ago, indicating slowing growth in Asia’s third largest economy.

The annual 5.6% growth in production at factories, mines and utilities was its slowest in nine months under a new data series.

The manufacturing sector, which contributes about 80% to overall industrial production, grew an annual 5.6% in May compared with a revised 6.3% a month earlier. During the month, mining and electricity sectors grew at 1.4% and 10.3% respectively.

In terms of industries, 14 out of the 22 industry groups in the manufacturing sector have shown positive growth during the month of May as compared to the corresponding month in 2010.

Infrastructure sector, which includes cement, steel and refining, grew 5.3% in May, slightly faster than the annual growth of 5.2% clocked in April. The sector contributes about 26% to the IIP.

In May, capital goods increased at a modest 5.9% compared to 15.8% during the same month a year ago.

With headline inflation WPI (wholesale price index) hovering around 9%, the RBI is widely expected to raise rates later this month, which would be the 11th increase since March 2010. A recent rise in state-set diesel prices is expected to add upward pressure on inflation.

The industry group ‘medical, precision & optical instruments, watches and clocks’ has shown the highest growth of 42.9% during the month, followed by 36.4% in ‘office, accounting & computing machinery’ group and 23.1% in ‘motor vehicles, trailers & semi-trailers’ group. On the other hand, the industry groups textiles, wood & products of wood, and cork except furniture, articles of straw & plating materials have shown the highest negative growth of 6.6% each.

“Despite this lower-than-expected release, which in turn confirms the moderating growth story, we still expect the RBI to hike rates by 25 bps in its July 26 meeting as inflationary pressures are still strong," said Anubhuti Sahay, economist at Standard Chartered Bank in Mumbai.

Private economists have been revising down their forecasts for growth in the current fiscal year, with many expecting India to grow less than 8%, after it expanded 8.5% in the year that ended in March.

Bank credit on the year as of 17 June was up almost 21%, with bank deposits lagging behind at over 18%.

Growth in money supply was slower at just over 17%, indicating banks are increasingly facing problems in lending at high interest rates, which in turn has led to a dampening of investment demand in the economy.

However, there are early signs of an uptick in investment demand. CLSA said in a recent report that the growth moderation in the economy would be temporary and that the old IIP series was overstating the extent of moderation.

Foreign direct investment (FDI) into India during April-May rose an annual 77% to $7.8 billion, a sign of improved momentum after the full-year inbound FDI fell 25% in the fiscal year through March as investors were deterred by a spate of corruption scandals and delays in project implementation.

The Organisation for Economic Co-operation and Development (OECD) on Monday said major emerging economies such as India, China, Brazil are showing clear signs of slowdown while the economies of the United States and Japan may be turning around.

Japanese consumer confidence improved for a second straight month in June, indicating that the world’s third largest economy will resume a moderate recovery in autumn.

However, a drop in China’s crude imports and disappointing US employment data reinforced fears of a demand slowdown in the world’s top two energy consumers.

Fresh concerns that Italy, the euro zone’s third-largest economy, could be forced into a financial crisis like Greece, Ireland and Portugal has added to a bleak global scenario.

Stocks extended losses after the data release and were down 1.3%, although bond yields and swap rates, already down on the day on global risk aversion, were little changed.

Reuters also contributed to the story.