Industrial growth measured by the movement of Index of Industrial Production (IIP) continued to be placed in the contraction mode and depicted stagnation. The data for December 2013 came in at -0.6% in December 2013 consistent with the drop in core sector growth data for December 2013, which slowed to +2.1% vis-à-vis +7.5% posted in December 2012. It is noteworthy that, the core sector data has a weightage of 37.9% on the IIP, and thus has a bearing on industrial growth.

So, the industrial growth is seen languishing for quite some time and demonstrating a 'see-saw' movement.
 

IIP stays in a contraction mode

Data as on December 2013, but released on February 12, 2014
(Source: CSO, PersonalFN Research)
An evaluation of some of the important components of IIP for December 2013 reveals the following:
 

• Manufacturing Index which occupies about 3/4th of the index weight registered a negative growth of -1.62% in December 2013 (as against -2.66% in the month prior). In terms of industries, eight (8) out of the twenty two (22) industry groups (as per 2-digit NIC-2004) in the manufacturing sector have shown negative growth during the month of December 2013 as compared to the corresponding month of the previous year. 'Radio, TV and communication equipment & apparatus' has shown the highest negative growth (of -35.7%), followed by 'Furniture; manufacturing n.e.c.' and 'Office, accounting & computing machinery'. But on the other hand, industry group such as 'Wearing apparel; dressing and dyeing of fur' has shown a positive growth (of +19.7%) followed by 'Chemicals and chemical products' and 'Electrical machinery & apparatus n.e.c.'.
   
• Consumer goods index recorded negative growth of -5.3%, wherein the Consumer Durable segment continued to be under pressure as growth decelerated at -16.2% on Y-o-Y basis, while Consumer Non-Durables registered growth of +1.6%, but here too growth seemed to have mellowed.
   
• Capital goods recorded a contraction for the month of December 2013 to -3.0%. But fortunately, basic goods and intermediate goods turned be saviour posting a growth of +2.4% and +4.5% respectively; both these categories showing an ascending trend in the last couple of months.
   
• Likewise Electricity data too came to rescue with +7.49% growth posted in December 2013 and momentum seen thereto. However, Mining data though +0.38% in December 2013 dwindled a bit from the previous month.
   

Impact on RBI policies...
The lull in industrial activity would be a serious concern. But the reduction in the recently released Consumer Price Index (CPI) inflation to 8.79% in January 2014 from 9.87% in the previous month may encourage the Reserve Bank of India to be accommodative in its stance going forward, provided the economy turns well on the disinflationary path. RBI in its Review of Macroeconomic and Monetary Developments for Q3 of 2013-14 has set a baseline projection for inflation (with the focus being on CPI inflation) at 8.00% over 12-month horizon, taking into account upside risk to inflation yet persist. The extent and direction of further policy steps will be data dependent; but if the disinflationary process evolves according to this baseline projection, then the RBI may have room to be more accommodative. Only in the second-half of 2014 if inflationary pressures ebb, the central may reduce policy rates which in turn may provide an impetus for industrial and economic growth rate.

Impact on equity markets...
Lacklustre performance of the manufacturing sector has been already factored in the prices and thus equity markets didn't react negatively to the contraction in manufacturing activity. Moreover, as recommended by the Urjit Patel Committee, RBI has adopted a strategy of inflation targeting. Thus, from the perspective of having an impact on monetary policy, IIP numbers have become less significant now. At this juncture, equity investors are waiting for the outcome of Lok Sabha elections and the budgetary stance of the new government. The markets may watch closely as to what stance the new government takes for reviving the manufacturing growth. Till then it is unlikely that, IIP numbers would have any significant impact on the movement of equity indices.

Impact on debt markets...
When interest rates are high, as they are at present, weaker IIP usually bodes well for the debt markets, as investors start pinning up hopes on sliding performance of the industry for a rate cut. However, as the focus of RBI remains on achieving pre-set inflation targets, debt markets too didn't show any significant impact. Bond yields were steady with no stress on liquidity. Fiscal deficit numbers which would be announced in the coming interim budget would provide guidance to debt markets.

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