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India's industrial production growth moderated to 3.6% in February 2011 from upwardly revised 3.9% growth recorded in January 2011. The growth of the industrial production for February 2011 was impacted by sharp fall in capital goods output for third sequential month. Excluding the capital goods sector, the industrial output has increased 7.0% in February 2011. The high base effect, as industrial output had surged 15.1% in February 2010, also depressed the output growth. Meanwhile, the sharp moderation in mining sectors growth to 2 years low of 0.6% in February 2011, also weighed on overall growth in industrial production. The industrial output growth has remained below 4% for last four sequential months, while it is expected to further remain weak for next few months owing to strong base effect. The growth of industrial production for January 2011 was revised upwards to 3.9% compared 3.7% growth reported earlier.
The growth of the industrial production was also below the expectations. As per Capital Market's poll of economists, the IIP was projected to grow at 4.8% for February 2011. The economists responding to the poll had forecasted the IIP growth in the range of 3.4% to 6.5% for February 2011. The median of various IIP growth forecasts stood at 4.8% for February 2011.
As per the use-based classification, the output of capital goods slumped 18.4% in February 2011, recording sharp fall for the third sequential month. The growth of the capital goods output was largely impacted due to huge base effect as the output of capital goods had surged 46.7% in February 2010. However, the growth of the output of intermediate goods improved to 8.4%, while the consumer goods output rose at double digit pace of 11.1% in February 2011. But, the pace of growth in basic goods production eased to 5.9% in February 2011.
The growth of the mining sector decelerated sharply to 2 years low of 0.6% during February 2011. This was largely due to sharp fall in coal output by 5.7%, which was the steepest fall in last 10 years and also as natural gas production dipped 7.3%, negating the positive impact of 12.2% surge in crude oil production. The growth of the electricity generation moderated to 6.7%, while the growth of manufacturing sector eased slightly to 3.5% during February 2011. Out of 17 manufacturing industry groups, about 15 industry groups recorded positive growth in February 2011. Industrial growth during April-February FY2011 has decelerated to 7.8%, compared to 10.0% growth recorded during the corresponding previous year period..
We expect rebound in mining sector, thanks to improving crude oil production and possible acceleration in Iron ore production, after Supreme Court lifted ban on export of Iron ore from Karnataka, effective from 20th April 2011. Similarly, with cotton yarn export resuming from 1st April 2011, without any restrictions as of now, and as there has been strong double digit growth in Ready Made Garment exports in February 2011, we can expect textile production to accelerate, despite possible squeeze of margins on spike in prices. But for the short term through April 2011, the textile industry has been impacted due to players penchant to scale down inventory pipeline, not only due to high prices, but also due to levy of excise duty on branded garments.
On capital goods, we expect situation to improve in a few months, factoring in new orders released by Power Grid in January – February 2011. If this were to be a trend of sustained fresh order inflows, it can invigorate the hitherto sluggish capital goods sector, and help improve the overall growth in industrial production.
We find that the consumption theme remains strong despite unacceptably higher inflation and shrinkage in non-discretionary spending. On the other hand, the investment theme has to shed its sluggishness and give way for growth sooner. But the high base effect coupled with adverse impact of interest rate hikes will continue to deflate the growth in the next few months.
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