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IIP growth: On expected lines

Aug 13, 2007

As reported by the Central Statistical Organisation (CSO), the Index of Industrial Production (IIP) grew at 9.8% during the month of June 2007, a trifle slower than the double-digit growth rates we were getting used to since July 2006 (except for 4.5% in October 2006, thanks to too many holidays!).

The main difference between the first quarter of FY06 and that of FY07 is the worsening of the overall power situation and the tougher interest rate regime. Both these have contributed to lower production. Also most industries are currently operating at almost full capacity. Most new capacities will kick in around March 2008. Thus growth in production was bound to be slower.

Average annual growth rates across manufacturing
(YoY Change)
(%) Weight in IIP FY06 FY07 Q1FY06 Q1FY07
Food Products 9.1 2.0 8.2 -5.7 17.1
Beverages & Tobacco 2.4 15.7 11.3 12.9 9.0
Cotton textiles 5.5 8.5 14.8 11.3 7.0
Other textiles 2.3 0.0 8.2 8.2 8.9
Jute & vegetable fibre 0.6 0.5 -17.2 -0.2 35.6
Textile products + Wearing apparel 2.5 16.3 11.2 14.6 9.2
Furniture & Fixtures 2.7 -5.7 29.1 -14.3 108.9
Leather & Fur Products 1.1 -4.8 0.3 -10.2 7.5
Paper Products, Printing, Publishing 2.7 -0.9 8.3 12.1 1.3
Rubber, Plastic, Petroleum & Coal products 5.7 4.3 12.7 9.1 9.8
Basic chemicals & products 14.0 8.3 9.2 11.1 5.5
Metal Products & Parts 2.8 -1.1 11.4 0.9 -0.3
Basic Metals & Alloys 7.5 15.8 22.8 20.8 20.8
Cement & other minerals 4.4 11.0 12.8 15.1 6.4
Capital goods excl. Transport equipment 9.6 12.0 14.0 13.7 20.1
Transport Equipment & Parts 4.0 12.7 14.9 20.3 0.7
Other Manufacturing industries 2.6 25.2 6.5 30.2 12.5

Most of the consumer goods have shown a downtrend. We expect this to continue over the next few months as the consumers face higher domestic interest rates and an inconsequential access to international funds to spend on rupee expenditures thanks to the government's new External Commercial Borrowings policy. This demand contraction ought to be continuous going up to December 2007 as required by the monetary policy ethic.

The investment demand however, seems to be going strong as seen by the growth in the capital goods industry. Both the government and the Reserve Bank of India have been emphatic on not wanting to derail the growth process in order to curb inflation. Thanks to the Reserve Bank of India's (RBI) pro-active management of India's forex inflows (currently at US$ 229 bn), the likelihood of money supply getting under control is higher. In such a scenario, we see negligible upside in the domestic interest rate regime from the current levels. This will continue to fuel India's investment boom and thus future growth.

The speed of clamping down on interest rates has been unprecedented in India's economic history where in the interest rates were increased by 5% in as many months. The most likely effect will be in the shortening of business cycles in India. A growth stimulated by domestic investment and through increased consumption, will be less dependent on the growth patterns in the rest of the world.

Any upside to IIP growth will come from new capacities going on line and a lowering of interest rates (probably about end-2007).

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