The industrial production growth for July 2011 was also sharply below economists expectations. As per the Capital Markets poll of economists, the industrial growth for July 2011 was projected at 6.2%. The economists responding to the poll had forecasted the IIP growth in the wide range of 4.0% to 7.7% for July 2011. The median of various IIP growth forecast stood at 6.2%, while the average was lower at 6.1%.

As per the use based classification, the basic goods posted the double digit growth of 10.1% with robust contribution from electricity generation. But, the capital goods sector recorded the steep fall of 15.2%, while the intermediate goods production also dipped 1.1% in July 2011. However, the production growth of consumer goods rebounded to 6.2% during July 2011. Among the consumer goods, the output of consumer durables and consumer non-durables moved up 8.6% and 4.1%, respectively during July 2011.

In terms of industries, fifteen (15) out of the twenty two (22) industry groups in the manufacturing sector have shown positive growth during the month of July 2011 as compared to the corresponding month of the previous year. The industry group ‘Office, accounting & computing machinery' has shown the highest growth of 38.3%, followed by 18.9% in ‘Basic metals' and 17.5% in ‘Other transport equipment'. On the other hand, the industry group ‘Electrical machinery & apparatus n.e.c.' has shown a negative growth of 46.0% followed by 12.5% in ‘Medical, precision & optical instruments, watches and clocks'.

Some of the important items of capital goods showing highly negative growth during the current month and thus contributing to the low growth of the overall index for the month include ‘Cable, Rubber Insulated' [(-) 64.9%], ‘Cement Machinery' [(-) 62.8%] and UPS/Inverter/Converter' [(-) 55.9%]. However, some important items of the Capital goods are also showing significant positive growth. These are:  ‘Computers' (47.1%), ‘Textile Machinery' (36.0%), ‘Ship Building & Repairs' (34.9%), ‘Machine Tools' (31.6%), ‘Tractors' (24.6%) and ‘Commercial Vehicles' (21.8%).

The other important items showing positive growth during the month are: ‘Woollen Carpets' (171.9%), ‘Molasses' (88.9%), ‘Stainless/ alloy steel' (63.0%), ‘Fruit Pulp'  (54.1%), ‘GP/GC sheets' (50.6%), ‘Aluminium' (43.6%), ‘Steel Castings' (42.4%) and ‘CR Sheets' (40.0%).

The manufacturing index contributed 185 bps or 56.4% (with new 2004-05 base) of the 3.28% growth in industrial production during July 2011. The mining index contributed 30 bps or 9.3%, while electricity garnered 113 bps or 34.3% to the overall growth in Industrial production during July 2011.

Among the 22 manufacturing industries group, the ‘Basic Metals' and ‘Food products and beverages' group contributed the largest share of 219 bps (66.8%) and 75 bps (22.9%), followed by ‘Radio, TV and communication equipment & apparatus' and ‘Motor vehicles, trailers & semi-trailers' group garnering 69 bps (20.9%) and 59 bps (18.0%) to the overall IIP growth in July 2011. Meanwhile, the ‘Other transport equipment', ‘Fabricated metal products, except machinery & equipment' and ‘Other non-metallic mineral products' contributed 40 bps (12.2%), 36 bps (10.9%) and 33 bps (9.9%), respectively to the IIP growth.

The industry groups ‘Electrical machinery & apparatus' and ‘Textiles' had a largest negative contribution of 3.32 bps (-101.2%) and 29 bps (-8.8%), respectively. Meanwhile, the industry groups ‘Machinery and equipment' and ‘Chemicals and chemical products' also had a negative contribution of 16 bps and 11 bps. Further, industry group ‘Tobacco products' contributed negatively by 10 bps to IIP growth during July 2011.

As per the use-based classification, Basic goods had a largest contribution of 387 bps (117.8%) to 3.28% growth in the industrial production during July 2011. The consumer durable had a contribution of 126 bps, while consumer non-durable had a share of 70 in IIP Growth bps during July 2011. However, capital goods had a negative contribution of 239 bps (-72.81%) to the growth, while intermediate goods also contributed negatively by 15 bps (4.7%) to the growth.

• Auto production (excluding tractors) increased 12.65% to 1681949 units in August 2011. The automobile production carries 5.46% weight in the Index of Industrial Production.
• Traffic at India's major 14 ports increased 3.58% to 44.349 million tonnes during August 2011.
• India's Merchandise exports surged 44.2% to US$24.3 billion in August 2011, while imports galloped 41.8% to US$38.4 billion.
• As per the data from Central Electricity Authority, India's electricity generation surged 8.93% to 72820.1 million units during August 2011. This strong growth in electricity generation would serve 81 bps to overall IIP growth during August 2011.
• The freight loading of Indian Railway has increased 2.1% to 75.75 million tonnes during August 2011 and 6.1% to 389.07 million tonnes during April-August 2011
• The non-food credit growth of the commercial banks has rebounded to 20.2% during August 2011 from 18.2% in July 2011.
• As per the data from Cement Manufactures Association of India, the cement production for the month of August 2011 increased 6.2% and 2.1% during April-August 2011. Meanwhile, the cement dispatches have increased 4.8% in August and 2.1% in April-August 2011.

Electrical machinery & apparatus n.e.c.: The group output dipped 46.0% in July 2011, contributing negatively by 332 bps to the overall growth in India's industrial production. The group output growth was driven by a single commodity named rubber insulated cable, that's output plunged 64.9% to 1257 kilometers during July 2011. Within the group, the output of aluminium conductor and DC motors dipped 14.0% and 71.8%. The production of Fluorescent Tubes, small transformers and UPS/Inverter/Converter also fell 16.1%, 21.9% and 55.9%, respectively in July 2011. However, the output of circuit breakers, special type transformer and fiber optic cables increased 21.7%, 41.3% and 6.6%, respectively.

Textiles: The output of textiles group fell 5.6% in July 2011 and 3.3% in April-July 2011 too. Within the group, the output of cotton yarn, synthetic yarn, grey cloth and non-cotton cloth dropped 14.0%, 12.9%, 7.7% and 7.5%, respectively. Further, the production of jute yarn, cotton knitted cloth and D.W.Tarpaulin also fell 55.5%, 17.6% and 66.7%. Meanwhile, the production of non-cotton yarn and sacking increased 1.8% and 9.2%, respectively.

Chemicals and chemical products: The group output dipped 1.3% in July 2011, while increased 2.6% during April-July 2011. Within the group, the production of Polystyrene, Purified terephthalic acid and Mancozab dipped 86.6%, 19.5% and 60.3%, respectively in July 2011. Meanwhile, the production of Complex grade fertilizers and High density polyethylene also fell 20.3% and 20.9%, respectively in July 2011. However, the production of Polypropylene, Ayurvedic Medicaments and dyes increased 451.6%, 40.9% and 36.6% in July 2011.

Machinery and equipment: The production of group fell 3.1% in July 2011. within the group, the production of room air conditioners, sealed compressors and packaging machinery declined 36.8%, 40.2% and 36.7%, respectively in July 2011. Further, the production of refrigerators, power driven pumps and forklifts declined 25.5%, 13.4% and 37.1%, respectively.

Basic Metal: The basic metal group, carrying largest weight in IIP among 22 industry groups, continues to record double digit growth at 18.9% during July 2011. The group output surged 16.1% in April-July 2011. Within the group, the output of sponge iron and stainless steel surged 34.8% and 63.0%, respectively. The production of HR coils and aluminium tubes also improved 23.7% and 39.5% in July 2011. The output of plates rose 15.2%, while that of bars & rods galloped 21.4%. The production of CR sheets, GP/GC sheets and carbon steel also increased 40.0%, 50.6% and 9.2% in July 2011. However, the production of copper wire and HR sheets dipped 9.9% and 40.3%, respectively.

Food products and beverages: The group production surged 14.4% in July 2011 and 13.4% in April-July 2011. The production of sugar and rice increased 491.0% and 16.94%, while that of industrial alcohol and tea moved up 17.8% and 8.2% in July 2011. The production of instant food mixes, Indian made foreign liquor and fruit pulp also increased 19.1%, 6.9% and 54.1%, respectively in July 2011. However, the production of castor oil, squashes, cotton seed oil, sunflower oil and skimmed milk declined 43.4%, 59.3%, 80.0%, 88.7% and 4.0%, respectively.

Radio, TV and communication equipment & apparatus: The group output jumped 11.7% in July 2011, but declined 1.8% in April-July 2011. Within the group, the output of telephone instruments, IC chips and amplifiers increased 15.5%, 11.1% and 12.9%, respectively in July 2011. However, the output of Colour TV Picture Tubes and Colour TV Sets declined 47.6% and 4.9% in July 2011.

Motor vehicles, trailers & semi-trailers: The group output increased 10.3% during July 2011 and 17.5% during April-July 2011. Within the group, the output of passenger cars and commercial vehicles surged 0.7% to 203222 units and 21.8% to 74119 units, respectively. Further, the output of auto ancillary & parts and utility vehicles increased 13.1% and 21.1% in July 2011.

Other transport equipment: The group output increased 17.5% during July 2011 and 18.6% in April-July 2011. Within the group, the production of motor cycles, three wheelers and scooters galloped 14.4%, 17.1% and 16.1%. The production of railway wagons and ship building & repairs also moved up 157.3% and 15.2%, while that of bicycles rose 13.1%. However, the production of railway coaches and railway axles dipped 13.0% and 26.3% in July 2011.

Fabricated metal products: The group output increased 11.4% in July 2011 and 14.2% in April-July 2011. The production of boilers, stamping and forging, razor blades and pressure cookers moved up 14.5%, 8.2%, 25.1% and 10.3%, respectively. The output of fasteners and aluminium utensils also rose 5.5% and 40.6%, but that of Cylinders and Electrical Stamping Lamination dipped 9.7% and 7.5% in July 2011.

Other non-metallic mineral products: The group production increased 8.5% in July 2011 and 2.3% in April-July 2011. Within the group, the production of cement, ceramic tiles and grinding wheels increased 10.9%, 22.2% and 1.4%, respectively in July 2011. Meanwhile, the production of marble tiles, granites and railway sleepers declined 12.4%, 17.5% and 5.6%, respectively.

Furniture manufacturing: The group output increased 6.9% in July 2011 and mere 1.6% in April-July 2011. Within the group, the production of gems and jewellery and pens of all kinds increased 45.9% and 8.9%, respectively. Meanwhile, the output of coir matting fell 23.4% in July 2011.

Coke, refined petroleum products & nuclear fuel: The group output increased 2.6% in July 2011 and 4.3% in April-July 2011. Within the group, the production of petrol, diesel and ATF increased 9.6%, 5.4% and 14.9%, respectively in July 2011. However, the production of lubricating oil, Propylene and washed coal fell 23.1%, 9.1% and 15.5%, respectively.

Experts Views

Indranil Pan, Chief Economist, Kotak Mahindra Bank

While data prints such as the IIP remain important for the RBI, this weak headline WPI might not have a too significant bearing for the RBI's monetary policy stance on September 16. This is because IIP trends remain on a steady path without considering the volatile capital goods numbers. Further, inflation continues to be a bigger worry considering that it is likely to be announced at around 9.8% levels for August. Even RBI's estimate of 7% for headline WPI inflation by end-FY2012E remains above the threshold level of inflation of around 6%. On the other hand, continuing high inflation in itself could be damaging for the economy and hence, RBI would be extremely wary of letting high inflation levels continue. To an extent demand compression is seen but RBI is expected to stay cautious as global commodity prices have failed to cool off as envisaged and the Indian Rupee has also depreciated lately. Thus, we keep our research bet intact for a 25 bps increase in the repo rate to signal RBI's anti-inflationary stance as growth is envisaged not to crumble below the potential levels of a broad 7.5-7.7%. Further, July IIP-ex capital goods production is at 5.5% which is higher than the June outturn of 3.7%. However, we expect that given the sharp deterioration in global financial markets, RBI might be willing to pause after it has hiked the repo rate to 8.25%.

Jay Shankar, Chief Economist, Religare Capital Markets

July IIP came in at 3.3% YoY, as against our estimate of ~4% YoY and much lower than the consensus estimate of 6.2% YoY. The June IIP number (8.8% YoY) is thus an outlier in a general trend of slowing industrial activity – in-line with other leading indicators and the PMI numbers. The manufacturing sector grew by 2.3% YoY in July, down from 10.3% last month and 10.8% in July'2010. The only encouraging signs were from the consumer durables sector (wt. 9% of IIP) which rebounded in the month of July to grow at 8.6% YoY from 1.5% in the previous month. Our estimate of headline WPI inflation for August (due Wednesday) is 9.7%. In terms of policy actions, even though it may be prudent for the RBI to pause now, we believe that the RBI may actually go ahead with another 25bps rate hike on Friday, to keep its anti-inflationary stance intact, perhaps for the last time in the current cycle.

Madan Sabnavis, Chief Economist, Care Ratings

With inflation still high, focus will be on increasing interest rates to control core inflation. The low IIP growth numbers will be of some comfort to the RBI that its policy has started working as capital goods and auto-growth have slowed down.

July IIP growth at 3.3% further accentuated industrial growth slowdown fear. While services sector account for a major share of economic activity, industrial sector has direct impact on exports performance. Electricity with 13.1% growth provided support to 3.3% IIP growth. Capital goods growth remained volatile (15.2% compression in July 2011) and compressed in July 2011 compared to July 2010 pointing towards impact of high interest rate and lack of demand on investment. Basic goods growth (10.1%) provides some comfort for future IIP growth trend, however, a contraction of intermediate goods (- 1.1%) is worrying.

Abheek Barua, Chief Economist, HDFC Bank

We believe that the IIP growth for FY12 is likely to average 6.0-6.5%. Adjusting for lower growth in construction which has especially come under pressure over the last quarter(construction growth fell to 1.2% in Q1FY12 against 7.7% a year ago and is not captured in monthly IIP data), industrial production could be lower at 5.5-6.0% but certainly not as severe as the 3.3% July reading implies. It is therefore likely that there is more that will play on the RBI's mind when it meets this Friday than today's release alone and it cannot be seen as a credible guide to the central bank's forthcoming rate decision. Inflation for August, 2011 is due for release on Wednesday and is likely to be far more crucial in shaping the central bank's monetary policy decision especially since core inflation remains above the monetary authority's comfort zone. We expect WPI inflation for August to print in at 9.8% and downside surprises if any are unlikely to alter our view that inflation will remain sticky in the 9.5-10.0% through November. This is likely to push the RBI to hike its repo rate by 25 bps in its mid-quarter review this week and persist with its anti-inflationary stance.

BNP Paribas

Indian production data came in much weaker than expected thanks to a wild swing in capital goods output. Excluding this volatile segment, the remaining 90% or so of output is estimated to have picked up for the first time in five months but remains weak when smoothing through monthly fluctuations. Combined with indicators ranging from domestic vehicle sales to PMI surveys, this adds to the list of evidence that real activity in the Indian economy is slowing. However, there is still little sign as yet of inflation risks subsiding in tandem with cooling growth momentum. The RBI, therefore, is likely to push through a final 25bp rate hike at its September monetary policy review to further entrench the economy's slowdown.

The sharp deceleration in IIP growth in July 2011 (3.3%) relative to the previous month (8.8%), is primarily led by the contraction in capital goods output even as growth of basic and consumer goods displayed a substantial improvement in that month. The latter is likely to reflect a boost from inventory restocking and may not signal a sharp improvement in consumer demand, while the continued volatility in growth of capital goods (de-growth of 15.2% in July 2011 following a steep 38.2% growth in June 2011) raises doubts over the relevance of the same as an input into policy making. On balance, with inflation expected to have accelerated in August 2011, we continue to anticipate that the RBI will persist with monetary tightening and hike the repo rate by 25 bps hike in the upcoming policy review.  

Outlook

Industrial production in July 2011, grew way below market expectations, on steeper fall in capital goods and sluggish production of intermediate goods. This coupled with low single digit growth in many 2 digit level industries dragged down the manufacturing sector growth to mere 2.3% in July 2011. Add to this, the fall in natural gas production has restricted the growth in mining and quarrying sector to mere 2.8% in July 2011. On the positive side, the growth in electricity sector recorded healthy 13.1% growth in July 2011.

The massive 300 basis points rise in repo rates over the last 18 months have started affecting the pace of growth in industrial sector in general and rate sensitive sectors in particular. The World economic growth has turned sluggish on contagion effect of debt problems of select EU countries and high unemployment levels in advanced markets. In these circumstances, some corners hope for pause in the rate hikes by RBI. But RBI has, time and again, made it clear that it has inflation control as the singular focus, and will pursue the same even if it meant compromising on short term growth.