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.

The industry group ‘Medical, precision & optical instruments, watches and clocks' has shown the highest growth of 42.9%, followed by 36.4% in ‘Office, accounting & computing machinery' and 23.1% in ‘Motor vehicles, trailers & semi-trailers'. On the other hand, the industry groups ‘Textiles' and ‘Wood and products of wood & cork except furniture; articles of straw & plating materials' have shown the highest negative growth of 6.6% each.

Some of the important items of basic goods showing high growth during the current month include ‘Molasses' (102.9%), ‘Stainless/ alloy steel' (49.0%), ‘GP/GC sheets' (37.7%), ‘sponge iron' (33.6%), ‘Fuel, Aviation Turbine' (33.4%) and ‘Steel Castings' (30.3%).

The other important items showing highly positive growth during the month are: ‘Sugar' (92.8%), ‘Printed Circuit Board/Plate' (63.7%), ‘Woollen Carpets' (58.0%), ‘Vitamins' (48.2%), ‘Industrial Alcohol (Rectified/Denatured Spirit)' (49.9%), ‘Computers' (42.6%), ‘Textile Machinery' (41.3%), ‘Ship Building & Repairs' (38.1%), ‘Oil, Lubricating' (33.3%) and ‘Commercial Vehicles' (32.1%).

The manufacturing index contributed 447 bps (with new 2004-05 base) of the 5.57% growth in industrial production during May 2011. The mining index contributed mere 16 bps, while electricity garnered 94 bps to the overall growth in Industrial production during May 2011.

Among the 22 manufacturing industries group, the ‘Basic Metals' and ‘Motor vehicles, trailers & semi-trailers' group contributed the largest share of 161 bps and 117 bps, followed by ‘Food products and beverages' and ‘Other transport equipment' group garnering 73 bps and 42 bps to the IIP growth. Meanwhile, the ‘Fabricated metal products, except machinery & equipment', ‘Coke, refined petroleum products & nuclear fuel' and ‘Chemicals and chemical products' contributed 41 bps, 36 bps and 31 bps, respectively to the IIP growth.

The industry groups ‘Textiles' and ‘Electrical machinery & apparatus n.e.c.' had a largest negative contribution of 34 bps and 32 bps, respectively. Meanwhile, the industry groups ‘Machinery and equipment n.e.c.' and ‘Rubber and plastics products' also had a negative contribution of 31 bps and 09 bps. Further, industry group ‘Tobacco products' also contributed negatively by 08 bps to IIP growth during May 2011.

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.

• Auto production (excluding tractors) increased 16.58% to 1604335 lakh units in June 2011. The automobile production carries 5.46% weight in the Index of Industrial Production.
• Traffic at India's major 14 ports increased 5.5% to 46.816 million tonnes during June 2011.
• India's Merchandise exports surged 46.4% to US$29.2 billion in June 2011, while imports galloped 42.4% to US$36.9 billion.
• As per the data from Central Electricity Authority, India's electricity generation has increased 8.0% to 70649.4 million kwh during June 2011.

Basic Metal: The basic metal group, carrying largest weight in IIP among 22 industry groups, continues to be the top contributor to IIP growth during May 2011. The group output increased 13.4% in May 2011. Within the group, the output of sponge iron and stainless steel surged 33.59% and 49.0%, respectively. The production of HR coils and aluminium tubes also improved 15.1% and 17.2% in May 2011. The output of carbon steel rose 8.5%, while that of bars & rods galloped 11.7%. However, the production of copper wire and copper products dipped 5.6% and 2.2%, respectively. Meanwhile, the production of HR sheets fell 15.7% in May 2011.

Motor vehicles, trailers & semi-trailers: The group output increased 23.1% during May 2011, while continues to be the second largest contributor to IIP growth. Within the group, the output of passenger cars and commercial vehicles surged 16.5% and 32.1%, respectively. Further, the output of auto ancillary & parts and utility vehicles increased 18.9% and 15.3% in May 2011.

Food products and beverages: The group production increased 12.9% in May 2011. The production of sugar and fruit pulp increased 92.8% and 7.3%, while that of industrial alcohol and molasses moved up 49.9% and 102.9% in May 2011. The production of rice, fruit juices and Indian made foreign liquor also increased 9.0%, 9.9% and 16.0%, respectively in May 2011. However, the production of aerated waters & soft drinks, cotton seed oil, castor oil, edible hydrogenated oil and jams declined 12.3%, 32.3%, 43.7%,11.4% and 21.6%, respectively.

Other transport equipment: The group output increased 19.9% during May 2011. Within the group, the production of motorcycles, three wheelers and scooters galloped 17.1%, 24.7% and 18.6%. The production of railway wagons and shipbuilding & repairs also moved up 113.7% and 17.9%, while that of locomotives rose 25.8%. However, the production of bi-cycles dipped 20.0% in May 2011.

Fabricated metal products: The group output increased 13.9% in May 2011. The production of boilers, stamping and forging, razor blades and pressure cookers moved up 28.3%, 17.6%, 27.4% and 12.6%, respectively. The output of fasteners and aluminium utensils also rose 22.6% and 28.5%, but that of tin containers and steel structures dipped 26.5% and 2.2% in May 2011.

Coke, refined petroleum products & nuclear fuel: The group output increased 7.14% in May 2011. Within the group, the production of petcoke, diesel and ATF increased 300.0%, 6.2% and 33.4%, respectively in May 2011. However, the production of naphtha, washed coal and kerosene fell 5.2%, 16.2% and 2.7%, respectively.

Chemicals and chemical products: The group output dipped 4.0% in May 2011. Within the group, the production of Polypropylene, vitamins and ayurvedic medicaments increased 563.1%, 59.3% and 25.6%, respectively in May 2011. However, the production of Polystyrene, Mancozab and purified terephthalic acid dipped 79.9%, 58.2% and 7.5% in May 2011.

Furniture: manufacturing n.e.c.: The group output increased 9.1% in May 2011. Within the group, the production of gems and jewellery and pens of all kinds increased 56.1% and 5.1%, respectively. Meanwhile, the output of coir mats fell 13.2% in May 2011.

Textiles: The output of textiles group fell 6.6% in May 2011, recording fall for the second sequential month. Within the group, the output of cotton yarn, synthetic yarn, grey cloth and non-cotton cloth dropped 7.7%, 15.0%, 9.6% and 8.9%, respectively. Further, the production of jute (sutli), cotton knitted cloth and D.W.Tarpaulin fell 56.7%, 22.3% and 54.2%. Meanwhile, the production of non-cotton yarn and woolen carpets increased 3.3% and 58.0%, respectively.

Electrical machinery & apparatus n.e.c.: The group output fell 6.2% in May 2011. Within the group, the output of aluminum conductor, generators and DC motors dipped 49.8%, 17.0% and 66.1%, respectively. The output of insulated cables and inverters also fell 2.5% and 25.4%. However, the production of circuit breakers, transformers and electric motors increased 29.6%, 7.0% and 26.0%, respectively in May 2011.

Machinery and equipment: The group output plunged 5.1% in May 2011. Within the group, the output of air conditioners, turbines & accessories, pumps, refrigerators and Printing Machinery declined 29.7%, 35.6%, 13.2%, 8.5% and 25.6%, respectively in May 2011. The output of agricultural implements, sealed compressors and forklift also dipped 66.3%, 2.9% and 25.0%, respectively. However, the production of heat exchangers, tractors and drilling equipment increased 32.6%, 25.6% and 24.4%, while that of earth moving machinery and bearings advanced 8.6% and 23.3%, respectively. Further, the production of packaging machinery, chemical equipment & system and textiles machinery increased 143.5%, 13.7% and 37.3%, respectively in May 2011.

Experts Views

Industrial production growth surprised on the downside again with signs of the slowdown clearly showing now. IIP growth for May was at 5.6% (Bloomberg consensus: 8.5%) while April growth was revised down from 6.3% to 5.8%. Manufacturing production was clearly weak as it contracted by 2.1% on mom basis in May. The consumer sector remained weak though growth rates were higher than April outturn. In the coming couple of months, production should remain muted due to rising borrowing costs and the monsoon. We expect output growth to stabilize and bounce back in the second half as rural incomes remain robust with an expected good agricultural season and as RBI pauses in its interest rate tightening cycle.

Jay Shankar, Chief Economist, Religare Capital Markets

India's Index of Industrial Production grew by 5.6% in May as against 5.8% (revised) in April, led by a moderation in manufacturing sector along with capital goods growth in the use-based classification. The IIP growth for April'11 has been revised downwards to 5.8% YoY from provisional 6.3%. The new IIP series has not lived up to the expectations. We maintain our FY12 estimate of industrial GDP (including construction) at 8.1% YoY. The RBI is likely to hike repo rate again on 26 July by 25bps.

Rohini Malkani, Economist, Citi Group

Weak June PMI, subdued auto sales, moderating credit demand etc. are concerning. However, trends appear to be more reflective of a soft patch as on the domestic front incremental policy momentum has been positive. With the WPI likely to remain elevated at 9-9.5% in the coming months and the RBI re-iterating that inflation is likely to get priority over growth, we maintain our view of the RBI hiking rates by a further 50 bps taking the repo rate to 8% by Dec11. However, the key is whether the RBI will hike in its July 26 meeting especially in context of the evolving debt issues in Europe. As of now, odds favor the RBI will continue its focus on domestic inflation and hike by 25 bps on 26 July 2011.

Data confirm that the economy is slowing down, led primarily by slowing consumer demand. This moderation appears set to continue as the manufacturing PMI has also moderated from a peak of 58.0 in April to 55.3 in June. The opposing forces of slowing consumption against strong exports and increased investment activity should lead the economy into soft landing. Overall, we expect industrial output growth to average 7.5% y-o-y in FY12 (year ending March 2012) compared to 8.2% in FY11. Even with ample signs of a growth slowdown, the Reserve Bank of India (RBI) will likely overlook such signs until inflation starts moderating meaningfully. As such, we expect the RBI to hike the repo rate by another 25 bps to 7.75% on 26 July.

The sharp deceleration in IIP growth somewhat contradicts the sharp jump in non-oil imports in May. IIP data for the next two months is crucial in order to assess whether the IIP growth slowdown in May is temporary or whether the decelerating trend will continue. We still expect growth in 2H FY12 IIP to be significantly better than in 1HFY12 policy outlook. Despite signs of moderating growth from various indicators, curbing high and stubborn inflation has become the primary focus for the Reserve Bank of India. Accordingly, we expect the forthcoming monetary policy review on 26 Jul '11 to raise the policy rates (repo/reverse-repo) by 25 bps each. We, however, expect that, post-Jul '11, the RBI will be in a wait-and-see mode before it decides about further rate hikes during the rest of FY12.

On the back of poor IIP reading of 4.4% (old series) for April 2011 the release for May 2011 data at 3.6% (as per old series) which is 5.6% (based on new series) has again disappointed for the second month running and is far below expectation of over 8% (new series). The impact of interest rate increases over the past 15 months is reflecting in the moderated growth numbers. The degree of slowdown in growth would have implications on RBI's rate increase plans. Inflation numbers are expected to be higher in line with the May 2011 WPI of 9.06% and hence it will be a challenging decision for further rate hikes to control inflation.

Outlook

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.