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IIP Points India’s Industrial Production Weak in July

IIP - Index of Industrial Production

IIP Points India's Industrial Production Weak in July

The IIP – Index of Industrial Production data released by the Central Statistics Office showed output at factories, mines and utilities has grown marginally at 0.1% in July compared to -1.8% in the previous month. Poor show by manufacturing, mining and capital goods sectors, reflecting weak economic activity add to the woes of IIP pressure. Capital goods output, seen as a key indicator of future investment, slumped 5% in July against a contraction of 13.7% in the same month a year ago. The pace of industrial expansion was slower than a forecast of 0.3% growth in a Reuters poll. In June, output contracted 1.8%. Growth in factory output, as measured by the index of industrial production (IIP), was 3.7% in July last year, and 6.1% in the April-July period in 2011-12. The manufacturing sector, which constitutes over 75% of the index, witnessed a contraction in output by 0.2% in July, as against growth of 3.1% in the same month last year. The data was more evidence that the problems afflicting Asia’s third largest economy are far from over. GDP has grown 5.5% or less in the last two quarters, a far cry from the 7-8% growth seen in the preceding period.

The performance of the manufacturing sector in April-July was poor as output contracted by 0.6%, as against a growth of 6.5% in the four-month period of last year. The output of capital goods contracted in April-July period by 16.8%, as against a growth of 8.2% in 2011-12. Mining output dipped in July by 0.7%, against a growth of 0.7% on A Year-on-Year Basis. The sector’s production in April-July quarter declined by 0.9%, compared to a growth of 0.6% in 2011-12. Consumer goods production was up 0.7% in July as compared to 6.4% growth in the same month last year. During the April-July period of this fiscal, the growth in the segment was 3.3%, compared to 4.9% in the four month period a year ago. Capital investment in the economy grew a meagre 0.7% in the quarter ending in June from a year earlier. Capital goods output has grown only once in the past 11 months. Structural woes are also stoking inflation, which has barely dipped below 7% in nearly three years. Headline inflation probably picked up to 6.95% in August from 6.87% in July. A senior Congress party leader told Reuters that party chief Sonia Gandhi had yet to decide on cutting subsidies on fuel, seen as the most urgent move to tackle a swelling deficit. With the manufacturing Purchasing Managers’ Index (PMI) easing to a nine-month low in August, the outlook for the sector does not look promising.

Equity Markets soar despite Weak IIP numbers on Global Cues:

A positive verdict from the German Constitutional Court gave a new lease of life to global as well as domestic markets. Indian Equity Market benchmarks made the most of the positive mood and the BSE Sensex soared past the 18,000 mark, recording a six month high closing. The Nifty too moved above the 5400 mark, ending the day at 5431. The domestic environment too looks pretty good with the monsoon picking up and FII flows to India increasing over the past couple of months.

What is IIP and what is the implication of this contraction?

The IIP data or the Index of Industrial Production data has a direct co-relation to the stock market. Every month the stock markets wait with bated breath to hear the IIP numbers. These IIP Numbers decide the market movement. IIP is the key tracker of industrial production. The IIP is the number denoting the condition of industrial production during a certain period. These figures are calculated in reference to the figures that existed in the past. Currently the base used for calculating IIP is 1993-1994.

The Importance of IIP:

IIP represents the state of health of the industry. If the IIP exhibits an increasing trend, it indicates that industrial production is steadily rising, thus indicating a healthy state of affairs for the economy. Under such conditions, one can expect a growth in the GDP. On the other hand, a decreasing trend of IIP indicates falling industrial production which becomes a cause for concern for economic growth. Today it is important because with the news of recession hovering over the horizon, better IIP figures would bring in hope and optimism among investors and the stock market with regards to the state of the economy.

Relation of IIP with stock markets:

The optimism amongst the stock markets and investors may translate into the markets going up. This is because the markets expect that company profits are set to rise and thereby leading to the growth in the country’s GDP. It could also lead to an improvement in the country’s economy, thus making it an attractive investment destination to foreign investors. The first time IIP was used with the year 1937 as its reference point. It contained only 15 products. Since then, the criteria for the base year as well as the number of products have been revamped 7 times. Currently, IIP uses 1993-94 as the reference year. The products included are the ones used on consistent basis and can comprise of small scale sector as well as unorganized production sector. They are segregated into 3 parts:

1) Manufacturing. 2) Mining. 3) Electricity.

They are also classified on the basis of usage:

1. Capital goods

2. Basic goods

3. Non-basic goods

4. Consumer durable’s

5. Consumer non-durable’s

The numbers for IIP are released within 6 weeks after the end of the month. This data is collated from 15 different agencies like The Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization and Central Electricity Authority. But at times, the entire data may not be easily available. Hence, some estimates are done to generate provisional data, which is then used to calculate provisional index. Once the actual data is available, this index is updated subsequently. Though IIP does indicate the condition of the country’s economy, it should not be taken as the sole basis for investment. This is because some sectors may show higher performance on the basis of underlying speculative practices. So one needs to ascertain the reasons behind an increase or decrease in IIP figures, before investing.

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