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India's industrial production growth moderated to nine months low pace of 5.6% (with the data for 2004-05 base) in May 2011 from 5.8% growth recorded in April 2011. Despite, the exiting of high base effect of May 2010, the industrial production growth moderated in May 2011 showing the impact of high inflation, monetary tightening and rising interest rates. The growth of the industrial production for May 2011 was also below the market expectations. As per Capital Market's poll of economists, the IIP was projected to grow at 8.2% for May 2011. The economists responding to the poll had forecasted the IIP growth in the range of 5.7% to 9.7% for May 2011. The median of various IIP growth forecasts stood at 8.2% for May 2011. However, the growth of industrial production for February 2011 has been scaled up to 6.68%, but that for April 2011 has been revised downwards to 5.76% compared to 6.44% and 6.30% growth reported earlier.
As per the use-based classification, the growth of the output of capital goods dropped to 6.0% in May 2011 from 7.3% in April and 15.4% in March 2011. The growth of the production of intermediate goods moderated sharply to nearly two year's low of 0.93% in May 2011. However, the growth of the basic goods as well as consumer goods improved to 7.23% and 5.44%, respectively during May 2011 from 6.87% and 4.35% growth during April 2011. Among the consumer goods, the growth of consumer durables output improved to 5.23%, while that of consumer non-durables rose to 5.62% in May 2011.
The growth of the mining sector (with new 2004-05 base) was steady at 1.4% during May 2011, which was largely supported by 1.1% growth in the coal output and 9.7% surge in crude oil production. The growth of the electricity generation surged to 10.3% from 6.4% in April 2011, while the growth of manufacturing sector eased to 5.6% during May 2011. However, out of 22 manufacturing industry groups, about 8 industry groups recorded negative growth in May 2011, which was highest since 9 industry groups recording drop in output in October 2009.
As per the use-based classification, basic goods had a largest contribution of 293 bps to 5.57% growth in the industrial production during May 2011. Capital goods contributed 78 bps to the growth, while intermediate goods served 13 bps of the growth. The consumer durable had a contribution of 76 bps, while consumer non-durable had a share of 97 in IIP Growth bps during May 2011.
The pace of growth in basic goods has been improving from 5.6% in February 2011 gradually to 7.2% in May 2011. On the other hand, capital goods sector recorded sharp deceleration in growth from 15.4% in March 2011 to 7.3% in April 2011, which further eased to 5.9% in May 2011. Similarly, consumer goods production growth tumbled down from 18.2% in February 2011 to 13.9% in March 2011 to 3.8% in April 2011, but marginally improved there from to 5.2% in May 2011. A combination of these factors lead to two months of deceleration in the overall growth in Index of Industrial production from relatively good 8.9% in March 2011 to 5.8% in April 2011, which further eased to 5.6% in May 2011.
Despite evidences of deceleration in growth, which can be partly attributed to high inflation and consequent monetary tightening, RBI may not be in a hurry to shift away from tight money policy. The full impact of rise in petrol, diesel, kerosene and LPG prices are not yet reflected in WPI based inflation numbers, and hence it will be premature to take alone the deceleration in growth to shift away from tight money policy.
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