The growth of the industrial production for July 2012 was slightly below economists expectations. As per the poll of economists conducted by Capital Market, India's industrial production was expected to increase 0.4% during July 2012. The economists responding to the poll had forecasted the IIP growth in the wide range of (-) 2.1% to 1.0% for July 2012. The median of various IIP growth forecast stood at 0.4%, while the average was lower at 0.3% for July 2012.

As per the used based classification, the output of capital goods continued to record fall for the fifth straight month at 5.0% in July 2012, while the pace of decline of improved from record decline of 28.1% in June 2012. The continued fall in capital goods production remains a major drag on industrial production, contributing mainly to the overall subdued growth of the industrial production. The intermediate goods output also declined 1.1% in July, while growth of the basic goods production moderated to 1.5% in July 2012. The growth of the consumer goods production also decelerated to 0.7% in July 2012. Among the consumer goods, the consumer durable output increased 1.4%, while that of consumer non-durable rose 0.1% in July 2012.

In terms of industries, about eight (08) industry groups out of the twenty two (22) industry groups in the manufacturing sector have shown positive growth. The industry group 'Publishing, printing & reproduction of recorded media' has shown the highest growth of 17.0%, followed by 12.5% in 'Machinery and Equipment n.e.c.' and 8.3% in 'Textiles'. On the other hand, the industry group 'Electric machinery and apparatus n.e.c.' has shown a negative growth of 12.8% followed by 12.2% in 'Office, accounting and computing machinery' and 11.5% in 'Furniture; manufacturing n.e.c.'.

Some of the important items showing high positive growth are: 'Antibiotics & its Preparations' (32.3%), 'Air Conditioner (Room)' (117.4%), 'Plastic Machinery Incl. Moulding Machinery' (63.0%), 'Newspapers' (19.0%), 'Generator/ Alternator' (58.1%), 'CR Sheets' (23.5%), 'Lubricating Oil' (92.1%), 'Petroleum Coke' (76.4%), 'Aerated Waters & Soft Drinks' (53.7%) and 'Sealed Compressors' (75.8%).

Some of the other important items showing high negative growth during the current month over the same month in previous year include 'Cable, Rubber Insulated' [(-) 39.6%], 'Sponge Iron' [(-) 23.6%], 'Fruit Pulp' [(-) 42.5%], 'Gems and Jewellery' [(-) 18.9%], 'Leather Garments' [(-) 37.0%], 'Sugar' [(-)56.7%], 'Vitamins' [(-) 42.2%], 'Fasteners (Excl. Zip Fasteners)' [(-) 20.2%], 'Ship Building & Repairs' [(-) 37.8%], 'Biscuits' [(-) 21.0%] and 'Grinding Wheels' [(-) 20.5%].

The indices for June 2012 have undergone the first revision and those for April 2012 have undergone the final revision in the light of the updated data received from the source agencies. The growth of the industrial production for June revised upward to (-) 1.75% compared to (-) 1.81% reported earlier, while that for April 2012 was revised downward to (-) 1.26% from (-) 0.9% reported earlier.

The entire growth in the industrial production was contributed by electricity generation, while offsetting for decline in the output of mining and manufacturing sector. The electricity generation has a contribution of 26 bps in the 0.06% growth in the industrial production during July 2012. The manufacturing index contributed negatively by 14 bps to the 0.06% increase in industrial production. Meanwhile, the mining sector also has a negative share of 0.08% in industrial production growth during July 2012. The negative contribution of 20 bps together from mining and manufacturing weighed on 26 bps positive contribution from electricity generation, pushing down the overall IIP growth to 0.06% in July 2012.

Among the 22 manufacturing industries group, the industry groups ‘Machinery and equipment' and ‘Textiles' had a largest positive contribution of 60 bps and 42 bps, respectively to IIP growth of 0.06% in July 2012. The industry groups ‘Chemicals and chemical products' and ‘Coke, refined petroleum products & nuclear fuel' also had a positive contribution of 40 bps and 37 bps, respectively. Further, the industry groups ‘Radio, TV and communication equipment & apparatus' and Publishing, printing & reproduction of recorded media' served to IIP growth with the positive share of 31 bps and 17 bps in July 2012.

About eight groups recorded positive growth during July 2012, serving the IIP growth with positive contribution. These eight groups have a positive contribution of 229 bps together to IIP growth. Meanwhile, these eight groups carry the weight of 33.6% together in the index of industrial production.

On the other hand, the industry groups, ‘Electrical machinery & apparatus' had the largest negative contribution of (-) 51 bps in the 0.06% growth in the industrial production followed by ‘Motor vehicles, trailers & semi-trailers' group contributing (-) 39 bps during July 2012. The industry groups ‘Basic metals' and ‘Furniture; manufacturing' also had a negative share of 38 bps and 31 bps, respectively to the IIP growth in July 2012. Further, the ‘Food products and beverages', ‘Wearing apparel; dressing and dyeing of fur' and ‘Rubber and plastics products' also had a negative contribution of 24 bps, 22 bps and 12 bps, respectively to the IIP growth.

The slowdown seems to have spread widely to the industrial production. About 14 groups out of 22 industry groups recorded negative growth during July 2012, contributing negatively to the IIP growth. These 14 groups have a negative contribution of 243 bps together to IIP growth in July 2012. Meanwhile, these 14 groups carry the weight of 41.9% together in the index of industrial production.

As per the use-based classification, Capital goods had a negative contribution of 65 bps to 0.06% growth in the industrial production during July 2012. Intermediate goods also contributed negatively by 15 bps. The basic goods had a positive share of 63 bps, while consumer durables also had a positive contribution of 23 bps to IIP growth during July 2012. However, the consumer non-durable contributed by mere 01 basis point to IIP growth during July 2012.

• Auto production (excluding tractors) declined at four years sharp pace of 7.0% to 1564259 units in August 2012. Domestic passenger vehicles sales declined 5.7%, while sales of two-wheelers and commercial vehicles fell 7.3% and 4.1% in August 2012. The automobile production carries 5.46% weight in the Index of Industrial Production.

• The growth of the revenue earnings of Indian Railway moderated to 17.8% at Rs 9378.46 crore during August 2012 from 19.3% growth recorded in July 2012.

• Electricity generation rose mere 1.7% to 74338 Gwh in August 2012, which shows that it would contribute 16 bps to IIP growth (+/-) during August 2012.

• Gross Direct Tax collections of central government has increased 6.51% to Rs 164413 crore during April-August 2012 as against Rs 154361 crore in the same period last year.

• HSBC Purchasing Managers' Index (PMI) – a headline index designed to measure the overall health of the manufacturing sector – posted 52.8 in August 2012, broadly unchanged from the reading of 52.9 recorded in July 2012.

• The HSBC India Composite Output Index posted 54.3 in August, broadly unchanged from the July reading and pointing to a further improvement in the Indian private sector activity.

Expert views

Aditi Nayar, Senior Economist, ICRA

Largely in line with our expectations (0.3%), industrial production displayed a marginal 0.1% rise in July 2012 reflecting the impact of a deficient monsoon on domestic consumer demand, a substantial decline in exports and continuing sluggishness in investment sentiments.

The concerns regarding the rainfall deficit prevailing during the first half of the monsoon season and the resultant uncertainty in the outlook for consumer demand impacted production levels, contributing towards the low 0.7% growth of consumer goods in July 2012. This trend may persist in the immediate term, as highlighted by the contraction in production of two-wheelers in August 2012.

Additionally, a contraction in hydro-electricity generation and prioritization of power for irrigation purposes impacted the availability of electricity for the manufacturing sector. The easing contraction displayed by the capital goods index in July 2012 (-5%) relative to the previous month (-28%) largely benefits from a benign base effect, even as investment activity remains weak in light of the continuing regulatory and policy issues.

Indranil Sengupta, India Economist, DSP Merrill Lynch

Incoming data support our call that while the worst may be over, there is likely still 6-odd months of pain left. July industrial growth, at a weak 0.1% today, came in line with our muted expectations. With growth set to slow below the RBI's 6.5% forecast, we expect a 25bp CRR cut in Monday's policy to soften lending rates. Unless lending rates come off by, say, 100bp (25-50bp done), FY13 growth may find it difficult to achieve even our 5.6% forecast. We do appreciate that Gov Subbarao is reluctant to take chances with the RBI's inflation fighting credentials by cutting rates when August inflation will likely come in at a high 7% (also consensus) on September 14. No matter! In any case, RBI rate cuts are not likely to translate into lending rate cuts until M3 growth normalizes to 16% from the current 13.7%.

Leif Lybecker Eskesen, Chief Economist for India & ASEAN, HSBC

Base effects for the volatile capital goods index helped hide the slowdown in other sectors. The momentum in industrial production continues to be dragged down by the lagged impact of monetary tightening, weak global economic conditions and poor domestic investor sentiments. In addition, frequent power outages have also held back output.

The promise of further monetary stimulus by global central banks has lifted prospects for stabilization in global economic conditions. However, global economic conditions will remain weak for a while still and weigh on exports.

Domestic demand, especially investment demand, is suffering both due to global economic uncertainty and, importantly, lack of structural policy reform. With a string of state elections round the corner and leading general election in 2014, progress on structural reforms is likely to remain slow. This was painfully demonstrated by the lack of policy measures cranked out during the monsoon session.

The growth slowdown is largely supply driven and needs a supply side response in the form of progress on structural reforms to boost growth. A policy rate cut from the RBI will do little to re-invigorate the supply side and would more so imply inflation risks by boosting demand pressures. The central bank is aware of these risks and will therefore stay on hold until Delhi delivers tangible progress on fiscal consolidation and supply side reforms.

Industrial production improved less than expected due to weak exports and domestic investment demand.

Mole Hau, Economist, BNP Paribas

Indian industrial data once again fell short of market expectations in July with a small annual increase. The severe power blackouts in the final days of July were likely to have played havoc with the data. However, production is estimated to have fallen in nine months of the past year, suggesting sustained weakness, while the latest round of survey evidence provides little sense of any genuine improvement in the near term. However, the August inflation report due out this Friday should confirm the persistence of price pressure. This, in turn, should reinforce the reality that RBI is boxed in, with room for stimulus strictly limited.

Sujan Hajra, chief economist, Anand Rathi Financial Services

Manufacturing continues to woe, contracting four out of the past five months. With high export-orientation (80% export-to-GDP ratio), the overhang of the global excess capacity is likely to keep manufacturing production subdued in FY13. Mining production may however improve in coming months, with the Supreme Court lifting mining ban on 18 mines (after 13 months of moratorium). We maintain IIP growth target of 4.6% in FY13 on weak manufacturing.

Despite bleak growth outlook and marginal easing of WPI inflation, we expect RBI to keep repo rate unchanged until Dec'12 as inflation remains way above RBI's comfort zone and retains several upside risks. In view of the fact that easing of liquidity rather than policy rate cut is more likely to bring down market interest rate, we expect the central bank to focus on easing liquidity in FY13 through open-market operations (`2trn) and by slashing cash reserve ratio (by up to 100bps).

Crisil

Industrial output remained nearly stagnant in July 2012, compared to the same month last year, growing by mere 0.1 per cent. The electricity growth fell sharply to 2.8 per cent in July from nearly 6.4 per cent in the April-June period. This, along with a contraction of mining and manufacturing output resulted in overall weakness in industrial production. Manufacturing sector output fell by 0.2 per cent, despite a relatively low base of last year. Weak external as well as domestic demand conditions have adversely impacted manufacturing output. According to the latest GDP estimate private consumption growth fell to 4.0 per cent in Q1FY13, its lowest level since FY03 and fixed investment grew by mere 0.7 per cent in Q1FY13. Merchandise exports contracted by 14.8 per cent in July due to adverse global conditions. Policy action on mining and power issues could create some upside to industrial growth going ahead.

Morgan Stanley

We expect that weak agriculture growth because of poor distribution of monsoons, continued deceleration in investment trend, a sluggish DM growth outlook and weakness in the service sector will keep growth at a 10-year low of 5.1% in F2013. We believe there is an urgent need for policy action from the government to address the deterioration in the fiscal deficit and persistent pullback in private investment. In the event of continued inaction from the government, we see high risk of a potential "deeper macro stress" scenario. That could entail further significant deceleration in GDP growth to 4.3% in F2013, sharper depreciation of the exchange rate, and a shock to the banking system with a huge rise in the impaired loan ratio above our current estimate of 9.5% by March 2014.

As we have been highlighting, we expect the stagflation-type environment to persist over the next three quarters. We think monetary policy will be less effective in dealing with the effects of a stagflation-type environment. We believe that the challenging inflation outlook coupled with persistent high fiscal deficit will not provide comfort to RBI to reduce policy rates in the next monetary policy review on September 17. We believe that the government's loose fiscal policy and strong rise in real rural wage growth without commensurate increase in productivity growth is at the heart of the current stagflation type environment. Hence, the key to effective reduction in cost of capital will be the government's efforts on fiscal tightening and management of rural wages.

Clearing Corporation of India

Industrial output remained stagnant with no signs of recovery as yet. Further, the slowdown in consumer demand as indicated by the marginal growth in consumer durables has become a cause for concern and raises doubts over the recovery. In addition, the falling trends in industrial investment is persisting as reflected by the steady fall in capital goods output. Further, the HSBC manufacturing PMI has fallen to a 9-month low of 52.8 in Aug'12 from 52.9 in Jul'12. In view of these developments, industrial output may post a lower single digit growth in Aug'12, primarily due to falling base.

Dhananjay Sinha, Emkay Financial Services

IIP growth print for Jul 2012 at 0.1% YoY came in weaker than market expectations and reinforces the persistent slowdown seen in industrial production. Contraction in the manufacturing sector data indicate continued contraction in investments. The poor industrial growth would weigh on the overall growth scenario with sharp deceleration seen in manufacturing as well as services. The suppressed inflation and upside risks to the same make RBI's task very difficult in responding to the slowdown. Tackling inflation requires concrete steps towards fiscal consolidation which in turn would support growth. A mere monetary stimulus at the current juncture would prove ineffective unless measures on the fiscal front are implemented. We thus believe, there is limited scope for a rate cut on Sept 17, 2012

Outlook

Return to positive, but feeble 0.1% growth in India's Industrial production in July 2012, was slightly below market expectations. The entire growth came from electricity generation, which is also witnessing deceleration from 8.8% rise in June 2012 to mere 2.2% improvement in July 2012. Worse still, we find that based on provisional data, the country's power generation growth decelerated further to mere 1.7% growth in August 2012. Deceleration in the consumption growth is a cause for concern, while still negative, there is fall in the pace of fall in capital goods production!