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India’s factory sector fared far worse than expected in July with the growth rate of the representative index of industrial production (IIP) plummeting to a low of 3.3%.

This is the sharpest year-on-year deceleration since October 2009, when it had come in at 2.3%. Industrial output had expanded 9.9% in July last year and by 8.8% in June this year.

Sequentially, too, the trend is depressing with industrial production registering a decline in three out of the four months of the current fiscal year, while the spurt in June was a meagre 2.8%.
All these are suggestive of a slowdown of sorts. Though the industrial index has been volatile, the average growth for the first four months, at 5.8%, is far behind what was recorded during the same period of last year (9.7%).

The setback in July 2011 has largely been triggered by the capital goods and intermediate goods sectors. In both, the decline in output during the month vis-a-vis last year has been very pronounced — 15.2% as against 40.7% in the case of capital goods and -1.1% as against 8.5% in intermediate goods.

While they had certainly acted as a drag on the overall performance, the industrial growth managed to stay in positive territory because of the respectable showing by basic goods — up 10.1% in July 2011 from 4.4% last year — and in consumer goods — up 6.2% from 5.8% — thanks to the combined weight of nearly 76% of these industry groups in the revised index of industrial production.

Interestingly enough, though the output of investment goods has been markedly scaled down in July 2011, the demand for consumer goods in the economy appears to be on the upswing. In consumer durables, discounting the high base effect of last year (14.8% ), in the latest month, the spurt has been of the order of 8.6%, while the recovery has been strong in consumer non-durables, from -0.9% to 4.1%.

Among the broad sectors of the index, July 2011 witnessed a big surge in power generation to 13.1% from 3.7% during the same month of 2010 but in mining and the heavyweight, manufacturing, the tempo has slackened considerably. In mining, from 8.7%, the incremental growth was down to 2.8% and in manufacturing, the growth rate had flagged from 10.8% to 2.3%. However, the average growth in manufacturing during the first 4 months is a decent 6% and there was an improvement in electricity to 9.4% from 5%.

At the two-digit level classification of the industrial index which boasts of 22 groups, as many as nine have shown an increase in production of 8% and more during July 2011, while in 7 others, there has been an absolute decline in output.For the 4-month period, the trend is broadly similar - 7 industry groups reporting a negative growth rate and an equal number with a jump of 8% or more.

The latest industrial output data may place the Reserve Bank of India in a piquant situation. In view of the incipient signs of a slowdown in the factory sector, it may prefer to press the pause button in its fine-tuning exercise of the monetary policy which is round the corner.

But, with inflation control being the main focus, the industrial slackness may not be out of place in its scheme of things. But the deciding factor may be the inflation number for August which is just a day away.