IIP grows 4.2% in July, beats estimates

A higher-than-expected 4.2% growth in the Index of Industrial Production (IIP) or factory output number for July compared to 4.4% (revised from 3.8%) in June has not buoyed all economists.

They want to watch the trend of different parameters in the IIP before they offer their verdict on whether economic recovery is on track.

Anis Chakravarty, chief economist and senior director, Deloitte India, said it would be a bit premature to say the economy was on the path of recovery. "While 4.2% industrial growth is a healthy number, we would wait before we pronounce anything. We were expecting 3-3.5% growth (in July IIP). A lot of it is base effect – consumer durable looks good, manufacturing has been showing consistently good performance over the last few months, electricity is also okay and mining has also picked up. The problem is volatility in capital goods, which is in contrast with gross capital formation, which has yet to pick up pace," he said.

Dhananjay Sinha, head of research, economist & strategist, Emkay Global Financial Services Limited, also felt the factory output number could be a bit "skewed" as it was largely led by capital goods and gems and jewellery sectors. "The growth (in July IIP) seems skewed as nearly 62% of the contribution in growth is from capital goods and gems and jewellery sector," he said in a statement issued by his brokerage firm.

According to him, even as capital goods sector grew 10.6% year on year (YoY), machinery and equipment, which is a leading indicator of infrastructure activity, declined 2.4% on annual basis.

Sinha attributed the surge in capital goods sector due to increase in government spending and doubted whether it could hold through the year with deteriorating domestic and global conditions, reflected by weak corporate sales and export growth respectively.

As per the data released by the government on Friday, manufacturing, which carries 75% weightage in the index, grew 4.7% compared with 4.6% in June. Electricity output also improved 3.5% from 1.3% during the same period, but slipped compared to 11.7% in July last year. Mining moved into positive zone with a 1.3% rise compared to -0.3% growth a month ago; it grew 0.1% in July last year.

Capital goods growth jumped 10.6% as against a contraction of 3% in July last year while consumer durables output rose 11.4% as against contraction of 20.4% during the same period.

The IIP growth for first four months of the current fiscal marginally slowed to 3.5% compared with 3.6% for the same period last year.

Aditi Nayar, senior economist, Icra, was concerned about the "considerable downward" revision in the growth rate for April 2015. "While the higher-than-expected IIP growth for July 2015 and the upward revision in the growth for June 2015 are positive, the considerable downward revision in the growth rate for April 2015 is disconcerting," she said.

She said the bump up in July's industrial growth was led by double-digit expansion in consumer durables and capital goods output, both of which benefitted from a favourable base effect that comes into play because of contraction in July 2014. "The contraction in consumer non-durables output for the second time in the trailing three month period partly reflects the negative impact of back-to-back weak harvests on rural consumer sentiment," he said.

Soumya Kanti Ghosh, chief economic adviser & general manager, economic research department, SBI, was a more optimistic and projected the IIP numbers to be higher in August. "We expect August IIP to be even higher based on our internal prognosis. After a tepid quarter, we can hope for a better time ahead and sectors like cables, bearings, casting forging, leather, paper, cement will come out with better numbers in the rest of the year.

Further, we have seen a growth of 60% in the number of companies registered in April-August 2015 compared to April-August 2014, which indicates that corporates are bullish and gearing up for the better days," said the state-owned bank's economist.

Ghosh, however, expressed concern over sluggish growth in electricity compared to last year.