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IIP: Will the buoyancy continue? - Views on News from Equitymaster

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IIP: Will the buoyancy continue?
Jul 13, 2007

The numbers for the Index of Industrial Production (IIP) released yesterday still show a robust over all growth of 11.1% YoY for May 2007, though it has come off the spectacular 14.5% growth recorded in March 2007. The 5% rise in interest rates in as many months has had people looking for clues for a general slowdown from the dizzy upward movement in the IIP over the last fiscal year. The impact of higher interest rates is yet to percolate through to the machinery manufacturers and their suppliers of metals and other basic mineral goods. Where the impact can be seen expectedly - is the transport sector (-5% YoY) and consumer durables (2.6% YoY).

Capital goods sector at 23% yoy growth probably is growing on the back of existing orders given during times of easier monies and where finances are already tied up. Most companies are working on order books that are filled to capacity for the next 18 to 24 months. However, if there is no let up on the interest rate front, some new capacities might get the axe, especially those that were already too expensive and unviable but where cheap money played a role in making the investment attractive. (click here to read our views on capital goods companies)

Fig.1: IIP sectoral constituents

On the flip side, one still has this immense potential demand for all kinds of cranes and tippers and mining equipment as India readies itself to right the lacunae in her systems. So thus, there might be a blip on the investment horizon over the next six to eight months because of the present increase in interest rates. This breather is wanted, as the Indian economy will fare better for it with the money flows into potentially more viable investments taking precedence over the more fickle segments.

Some sectors show a definite slowing

Textiles as a sector is also gradually sliding into lower single digits maybe due to a stronger Rupee affecting exports or may be a general lower domestic demand being reflected in the slower growth. All intermediate goods that need to be further processed into finished products like plastics and rubber too has decelerated; this can be attributed to a lower demand thanks to the sudden hike in interest rates. For the month of May 07, 52% of the weight of the IIP shows slower growth as compared to 36% barely three months ago.

We see this calming of waters on the growth front as a necessary breather in the upward movement of the economy over the next few years. So long as capital does flow into deserving areas, there should be no worry even if the numbers do slow down in the interim.

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