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July IIP: why there is little to cheer about economy

India's factory output rebounded unexpectedly, rising 2.6 per cent in July from a year earlier. This was the first expansion in industrial output in three months and raised hopes that the worst might be over as far as economic slowdown is concerned. However, many analysts said it's too early to jump to conclusions.
Here are five reasons why it's too early to say economy has bottomed out:
  1. No reason to cheer yet: The rebound in industrial output was on account of a sharp jump in capital goods production, which rose for the first time in four months. However, the rebound in the sector was mainly driven by a nearly 84 per cent jump in the production of electrical machinery and apparatus. Of this, the volatile category of "rubber insulated cables" (with a weight of 0.1 per cent in industrial production) rose a staggering 336 per cent.

  2. Lumpy data: The spurt might be seasonal (and hence will not sustain) or there might be an error in the data (which has happened in the past). Sonal Varma of Nomura said, "We don't see this as sustainable as it is driven by one volatile category, which will likely reverse." Gautam Chhaochharia, head of India Research at UBS said some items have been lumping causing the headline number to be positive. I would not call it a recovery. "It's just a one month number to begin with," he added.

  3. Manufacturing a cause of worry: Excluding electrical machinery and apparatus category, manufacturing output actually fell by 0.9 per cent in July. This is a cause of worry because the manufacturing sector constitutes about 76 per cent of industrial production. Unless there is a sustained revival of the manufacturing sector, there will be no pick-up in corporate investments.

  4. Rupee fall aided IIP: The growth was led by export oriented industries (textiles, leather products, refined petroleum, etc.) which together account for 37 per cent of the IIP manufacturing index and contribute to around half of India's total merchandise exports. The growth in these industries was fuelled because of rupee weakness. Domestic research agency Crisil said the cushion from export oriented industries will not be sufficient to offset the slowdown in domestic demand dependent manufacturing industries.

  5. Weak discretionary demand: Consumer goods output in July fell by 0.9 per cent compared to a year ago, while basic and intermediate goods output growth were only marginally better than last month.

Story first published on: September 13, 2013 10:29 (IST)

Tags: IIP, industrial production, manufacturing growth

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