IIP: Sending the right signals... - Views on News from Equitymaster

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IIP: Sending the right signals...

Jan 14, 2005

Over the last few days, the Indian indices have witnessed strong selling pressure, resulting in the benchmark index (the BSE-Sensex losing nearly 9% from its all time high of 6,679 points recorded on Jan 3, 2005. This fall was attributed to profit booking on account of a 'healthy' correction and also to the vibes from the US Federal Reserve on the interest rate scenario. One of the major triggers to the downfall was the release of the minutes of the Fed meet in December, which mentioned that interest rates in the US are likely to rise at a faster rate. However, soothing statements by the Finance Minister and the scrapping of the controversial Press Note 18 brought back the investors to the markets, which saw the indices closing strongly in yesterday's trades. Also aiding the sentiment was the economic performance as indicated by the IIP (Index of Industrial Production) figures released for the period of April-November 2004. Let us take a look at some important points of the same.

  1. The official IIP registered a growth of 7.9% in November as compared to 8.2% during the corresponding period last fiscal. For the eight-month period, April-November, the growth figures look more attractive with 8.4% YoY growth as compared to 6.4% during the same period last fiscal.

  2. A major contributor to this growth was the manufacturing sector, which witnessed YoY growth of 8.9% during the first eight months of the current fiscal as against 7.1% during the corresponding period last fiscal. The index of capital goods has jumped by 13.5% during the said period as against 9.7% during the corresponding period last fiscal.

  3. The consumer durables segment also grew at a healthy 15.8% during the first eight months of the current fiscal as compared to 8.7% growth witnessed during the same period previous fiscal. Higher income resulted in higher purchasing power, which led to this growth.

The below mentioned table gives a quick glance of the growth witnessed by the major sectors of the IIP.

Sectoral growth
Sectors April-Nov '03. April-Nov '04 (%) change
Mining 140.3 147.2 4.9%
Manufacturing 188.9 205.7 8.9%
Electricity 168.3 179.7 6.8%
General 181.7 196.9 8.4%

One major factor that draws the attention is the growth of 13.5% in the capital goods segment. This comes on the back of improved economic performance on the macro level and stronger balance sheet of India Inc. To put things in perspective, global economy witnessed a sort of recovery led by a hike in commodity prices during the last year. All this while, the Indian industry had not witnessed any significant capacity expansion and addition, resulting in the narrowing of the demand and supply gap. However, in order to address the rising demand, huge capex plans have been lined up, thereby resulting in higher non-food credit offtake for the banking sector.

This should, under normal circumstances, augur well for the banking sector as well. However, competitive pressures have resulted in an insignificant rise in interest rates. Further, the government has shown its intent to speed up the construction and infrastructure activities, which would help the economy in the long run. All in all, the economy is on a right path to growth in the current fiscal and the long-term signals seem to be positive for the investors.

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