The growth of the industrial production was below the market expectations. As per Capital Market's poll of economists, the IIP was projected to grow at 5.7% for April 2011. The economists responding to the poll had forecasted the IIP growth in the range of 3.5% to 8.6% for April 2011. The median of various IIP growth forecasts stood at 5.7% for April 2011.

The Central Statistics Office has also released the data on Index of Industrial Production for April 2011 with new 2004-05 base, showing the 6.3% growth in industrial output in April 2011 compared to 8.9% growth recorded during March 2011. However, the growth of the industrial production during April 2011 was the lowest in last 7 months compared to 6.1% growth recorded in September 2010.

As per the use-based classification, the growth of the output of capital goods (with old 1993-94 base) dropped to 2.5% in April 2011 from five months high growth of 13.6% recorded in March 2011. The growth of the production of intermediate goods as well as consumer goods moderated to 2.4% and 5.9%, respectively during April 2011 from 6.1% and 8.2% growth during March 2011. Among the consumer goods, the growth of consumer durables output decelerated to 9.2%, while that of consumer non-durables eased to 4.5% in April 2011. However, the output of basic goods increased 5.6% in April 2011 higher than 4.4% growth recorded during March 2011.

The growth of the output of capital goods (with new 2004-05 base) eased slightly to 14.5% in April 2011 from 15.4% growth recorded in March 2011. The growth of the production of consumer durable goods as well as consumer non-durable goods moderated sharply to 3.8% and 2.1%, respectively during April 2011 from 6.1% and 8.2% growth during March 2011. However, the output of intermediate goods increased 3.4% in April 2011 higher than 1.8% growth recorded during March 2011.

The growth of the mining sector (with new 2004-05 base) improved to 4 months high pace of 2.1% during April 2011, which was largely supported by 2.9% growth in the coal output and 11.0% surge in crude oil production. The growth of the electricity generation was lower at 6.5%, while the growth of manufacturing sector tumbled to 6.9% during April 2011. Out of 22 manufacturing industry groups, only 16 industry groups recorded positive growth in April 2011.

The industry group ‘Office, accounting & computing machinery' has shown the highest growth of 96.5%, followed by 22.9% in ‘Motor vehicles, trailers & semi-trailers' and 22.3% in ‘Fabricated metal products, except machinery & equipment'. On the other hand, the industry group ‘Furniture; manufacturing n.e.c.' has shown a negative growth of 15.0% followed by 13.5% in ‘Wood and products of wood & cork except furniture; articles of straw & plating materials'.

The Central Statistics Office has also released the data on Index of Industrial Production for April 2011 with new 2004-05 base. Under the new series, the weight of manufacturing sector has been brought down from 79.4% to 75.5%, along with an increase in the weight of mining from 10.5% to 14.2%. The weight of the electricity is also raised slightly to 10.32% from 10.12% earlier. However, the classification on use-based has not undergone any change.

More importantly, the number of items used for calculating the index of manufacturing sector has increased sharply from 301 items under old 1993-94 base to 397 items under new 2004-05 base. The CSO has also introduced number of new items, while replacing many old articles. The number of industry group under manufacturing has been raised to 22 industry groups from 17 industry groups earlier. However, the growth of the industrial production under new and old base widely varies due to change in weights, addition of new items etc.

The manufacturing index contributed 547 bps (with new 2004-05 base) of the 6.31% growth in industrial production during April 2011. The mining index contributed 24 bps, while electricity garnered 58 bps to the overall growth in Industrial production during April 2011.

Among the 22 manufacturing industries group, the ‘Basic Metals' and ‘Motor vehicles, trailers & semi-trailers' group contributed the largest share of 159 bps and 124 bps, followed by ‘Machinery and equipment' and ‘Food products and beverages' group garnering 60 bps each to the IIP growth. Meanwhile, the ‘Other transport equipment', ‘Chemicals and chemical products' and ‘Coke, refined petroleum products & nuclear fuel' contributed 41 bps, 36 bps and 34 bps, respectively to the IIP growth.

The industry groups ‘Furniture; manufacturing' and ‘Textiles' had a largest negative contribution of 46 bps and 30 bps, respectively. Meanwhile, the industry groups ‘Wood and products of wood & cork' and ‘Rubber and plastics products' also had a negative contribution of 15 bps and 11 bps. Further, industry group ‘Tobacco products' also contributed negatively by 10 bps to IIP growth during April 2011.

As per the use-based classification, basic goods had a largest contribution of 223 bps to 6.31% growth in the industrial production during March 2011. Capital goods contributed 211 bps to the growth, while intermediate goods served 80 bps of the growth. The consumer durable had a contribution of 37 bps, while consumer non-durable had a share of 40 in IIP Growth bps during March 2011.

The manufacturing index contributed 375 bps (with old 1993-94 base) of the 4.38% growth in industrial production during April 2011. The mining index contributed 13 bps, while electricity garnered 50 bps to the overall growth in Industrial production during April 2011.

Among the 17 manufacturing industries group, the ‘Food Products' and ‘Transport Equipment and Parts' group contributed the largest share of 158 bps and 129 bps, followed by ‘Other Manufacturing Industries' and ‘Basic Metal and Alloy Industries' group garnering 108 bps and 85 bps, respectively, to the IIP growth. Meanwhile, the ‘Rubber, Plastic, Petroleum and Coal Products', ‘Beverages, Tobacco and Related Products' and ‘Paper & Paper Products and Printing, Publishing & Allied Industries' contributed 39 bps, 33 bps and 16 bps, respectively to the IIP growth.

The industry groups ‘Textile Products (including Wearing Apparel)' and ‘Wood and Wood Products; Furniture and Fixtures' had a largest negative contribution of 70 bps and 59 bps, respectively. Meanwhile, the industry groups ‘Wool, Silk and man-made fibre textiles' and ‘Basic Chemicals & Chemical Products (except products of Petroleum & Coal)' also had a negative contribution of 31 bps and 27 bps. Further, industry groups ‘Cotton Textiles' also contributed negatively by 15 bps to IIP growth during April 2011.

As per the use-based classification, basic goods had a largest contribution of 156 bps to 4.38% growth in the industrial production during March 2011. Intermediate goods contributed 62 bps to the growth, while capital goods served 40 bps of the growth. The consumer durable had a contribution of 85 bps, while consumer non-durable had a share of 94 in IIP Growth bps during March 2011.

• Auto production (excluding tractors) increased 18.4% to 1607725 lakh units in May 2011. The automobile production carries 1.48% weight in the Index of Industrial Production.
• Traffic at India's major 14 ports increased 4.0% to 50.185 million tonnes during May 2011.
• India's Merchandise exports surged 56.9% to US$25.9 billion in May 2011, while imports zoomed to US$40.9 billion.
• The freight loading of India Railway surged 7.5% to 79.78 million tonnes during May 2011.
• As per the data from Central Electricity Authority, India's electricity generation has zoomed 10.5% to 75105 million kwh during May 2011.

Experts Views

Growth concerns had emerged strongly following the lower-than-expected 4QFY11 GDP. In fact, industrial activity trends under the old series corroborate this argument as industrial growth had nearly halved from 10.6% in 1HFY11 to 5.6% in 2HFY11. However, policymakers are likely to draw some comfort from the trends in the new series, which are likely to be better representative of the current production trends. As per the new IIP series, the moderation in industrial activity is more gradual, with growth coming down from 8.3% in 1HFY11 to 8.1% in 2HFY11. Thus, the recent alarm bells on growth appear a bit more exaggerated than possibly warranted. Thus, inflation will remain the focus of policymakers. The latest (23rd) survey of Inflation expectations of households conducted by RBI also indicates that inflation expectations continue to remain strong. Under this survey, inflation is expected to average 11.9% and 12.7% in the coming 3-months and 1-year respectively, compared to the perceived current inflation rate of 11.5%. We also estimate Headline WPI for May to be at around 8.8% and continue to expect RBI to hike the repo rate by 25bps in its mid-quarter review on 16 June 2011. We also stand by our assessment that the Repo rate will peak at around 8.0%.

Jay Shankar, Chief Economist, Religare Capital Markets

The growth trend, especially with the new series coming in and the three month moving averages of the headline IIP growth numbers, confirms to our view that we have already seen the bottom of industrial activity. Private consumption also appears to have moderated in April and May, after Q4FY11 GDP numbers revealed that investment demand has slowed down as well. This is a positive signal that the economy is responding to monetary policy actions. This also provides confidence that inflation is likely to be in control finally, thereby also providing some certainty to peaking of interest rate hike cycle soon. We believe that inflation will peak around Sept/Oct close to 11%, averaging 8% in FY12, along with policy rates peaking simultaneously around the same time at 8% from 7.25% repo currently. The numbers to watch out for from the broader economy points of view in the months to come are monsoon progress, pick-up in investment cycle, global factors like commodity prices especially the crude, QE in US and developments in the European sovereign debt in the periphery economies.    

Taking into account limited progress on the policy front, the IIP numbers are likely to remain lack-luster till about August. We maintain our view that FY12 will likely be a year of two halves, with 1H GDP in the 7.5 to 7.8% YoY range; and an uptick in the 2H GDP likely to be dependent on a recovery in investments which saw growth decelerating to 0.4% in 4QFY11.  The soft 4QFY11 GDP data and other sectoral trends have once again brought debate on a possible pause by the RBI. We maintain our view that the RBI is probably in its last quartile of tightening and expect a further 50-75bps hike in policy rates with a 25bps hike likely in its policy review meeting on June 16. Interestingly, at our on-going investor conference, RBI Deputy Governor, Dr Gokarn, admitted that while the current drivers of inflation (food/commodity prices) are outside the purview of monetary policy, the RBI's aim is to contain the pass-through of higher prices through demand management.

On a base year of 2004-05, capital goods sector recorded healthy 14.5% increase, followed by 7.3% increase in production of basic goods and mere 3.4% increase in production of intermediate goods in April 2011. Worse still, the consumer goods recorded just 2.9% growth with non-durables inching up by 2.1% and durables recording slightly better 3.8% increase in production in April 2011.

On the one hand, the industrial production growth remains sluggish, and on the other, inflation remains higher than tolerable levels. So, RBI may not be aggressive in rate hikes, but is set to settle for baby steps of 25 basis points hike in repo rate in the ensuing monetary policy review.

Though RBI has taken GDP growth at 8.0% in FY 2011-12 for policy purposes, we strongly believe that the growth is set to be higher, with better traction in capital goods sector. That the current fiscal is the ultimate year of the eleventh five year plan and has one more day (366 days) than the previous year should help improve the growth. Also, if only the South West Monsoons 2011 are good, then it will be second successive year of good monsoons. At the same time the agri commodity prices, globally and in India, remain elevated. So, two consecutive too good years with increase in production and prices should help accelerate rural consumption. Viewed in this perspective too, if only there are no major global shocks, India is set to surprise with better than 8.0% growth in GDP in the current fiscal.