It was expected that, growth in the Industrial output for the month of May would be higher than that recorded in April. However, a rise of 2.7% in the Index of Industrial Production (IIP) recorded in the month of May 2015, has been lower than 3.4% growth posted in April.

Recently released data on the performance of core industries were encouraging and had given rise to high hopes. Core sectors contribute about 38% in the IIP Index. Industries such coal, crude oil, electricity, natural gas, refinery products, fertilisers, steel and cement together posted 4.4% growth, the fastest growth since November 2014. As a reason it was widely anticipated that, the IIP numbers for May would be impressive.

But in reality, poor performance of consumer goods segment and broader lull in other manufacturing industries negatively affected the overall industrial performance in May. Furthermore, there have been two downward revisions. IIP for April has been revised downward from 4.0% to 3.4%. Similarly, that for February 2015 has also been revised fractionally downwards.
 

Industrial Growth Declines?

Data as on July 10, 2015
(MOSPI, PersonalFN Research)  

IIP Performance at glance-
Manufacturing growth: 2.2%
Growth in mining: 2.8%
Rate of growth in the electricity sectors: 6.0%

What dragged the manufacturing index?
Manufacturing index that has a weightage of about 75% in the IIP showed mediocrity. Key segments such as capital goods (growth of 1.8%) and consumer goods (decline of 1.6%) marred the performance of manufacturing index.

How markets have reacted?
Markets seem to have overlooked the disappointing industrial performance as there were some important developments globally that affected the market sentiment in a positive way. Greece has been successful in securing a third bailout package which has averted its exit from the Euorozone, although temporarily. Furthermore, there is a sense that markets may give some more time to the industry for showing some significant improvement.

What to expect?
PersonalFN is of the view that, positives of policy rate cuts announced by RBI in the calendar year 2015 so far, may take a while to reflect their favourable impact on industrial growth. The Government is hopeful that India may achieve 8%-10% growth. To attain such high growth rate, Indian industries, and specifically the manufacturing industries, should start contributing significantly.

There is a problem with demand revival as many industries are operating at their 65%-70% of capacities. This suggests that, although higher interest rates have negatively affected the growth, poor demand has been the real culprit. The Government has tried to revive the stalled projects but whether would they contribute in reviving the capex activity remains to be seen. A study conducted by UBS suggests that 3/4th of the 540 projects analysed, were unviable for a number of reasons.

The Government has announced a new scheme for the revival of capital goods sector wherein Department of Heavy Industries (DHI) will bring in Rs 580 crore for the technological upgradations in the sector. Industrial bodies are also expected to contribute around Rs 357 crore this Financial Year (FY). Moreover, projects such as development of smart cities and thrust on renewable energy may also help in capex revival and in turn would affect the industrial growth positively.

Having said this, factors such as monsoon, inflation and monetary policies of RBI among others, would be critical to industrial growth. Monsoon so far has been satisfactory as it has stayed in a range of 96% to 104% of Long Period Average (LPA) but given its uneven spread and disruption, there is still a threat of high food price inflation. Higher inflation affects industrial growth negatively. It keeps interest rates up and brings down the demand.

On the policy front, amendments to labour laws and land acquisition bill would remain vital for higher industrial growth.

PersonalFN believes, although it is important for you to keep a track of macro-economic developments, you shouldn’t speculate on any of them. Your financial goals and your risk appetite should guide your investment decisions.

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