Core sector, export growth cloud July IIP outlook.

NEW DELHI: The six infrastructure industries grew 3.9% in July, marginally higher than in June, but the contraction in steel and cement production has raised doubts about the overall industrial output growth, which slowed to a 13-month low in June.

“It is difficult to predict the IIP figures for July because of the mixed data so far,” said Sonal Verma, an economist with Nomura Holdings, giving a range of 7%-9% industrial growth for July.

Industrial output growth had dropped to 7.1% in June and the mixed performance of core sector and sharply lower exports growth in July seem to suggest that it is unlikely to bounce back to double-digit levels soon.

The headline core sector growth in July is better than the 11-month low of 3.6% for June, but strong double-digit growth in crude and petroleum refining has masked an otherwise poor set of numbers, data released on Friday showed. Cement and steel production has contracted by 0.2% and 0.9%, respectively from a year ago while production of electricity was up 3.8%, almost same as June.

The six core industries — crude oil, petroleum refining, coal, electricity, cement and finished steel — have a combined 26.7% weight in the index of industrial production, or IIP, and are considered an advance indicator of industrial activity. The industrial growth numbers for July will be released on September 10.
The exports growth has also moderated sharply to 13.2% in July from over 30% in the months before, further clouding the outlook for the industrial sector.

Within the six core sector industries, cement and steel are considered better immediate indicators of industrial activity as their production is demand driven, whereas in the case of others, the supply is always short of demand that have to be met with imports.

But Crisil chief economist Sunil Sinha does not read too much into the performance of cement and steel sectors. “Monsoons are expected to affect the production of cement and more so for steel but the broader concern is the overall infrastructure growth.”

The cement and steel data is also at variance with the marginal improvement in the purchasing managers’ index, or PMI, for July.

However, economist are concerned with the longer term impact of the slowdown in the infrastructure sectors. “We estimate Infrastructure to grow by 4.2% by end of the calendar year,” said Madhumita Ghosh, head of research, Unicon Investments Crisil’s Mr Sinha said: “If the infrastructure does not keep pace it will cause a drag on all the other sectors.”

However, the likely pause in interest rates will help provide some impetus to investment activity. The Reserve Bank of India governor D Subbarao said on Friday that inflation pressures were easing and going forward the central bank will take a caliberated policy action.

Source : economictimes.indiatimes.com