June 2011 IIP figures

India’s June industrial output grew at a better-than-expected pace propped by a robust rise in capital goods, but economists said the trend cannot be sustained as it did not correlate with an economy buffeted by high interest rates and inflation. Industrial output rose 8.7% in June from a year ago after an upward revised 5.9% gain in May and well ahead of a median 5.5% estimate in a Bloomberg poll, data released on Friday showed. The rebound was driven by a 10% surge in manufacturing output and a 37.7% rise in production of capital goods. Discounting the rebound in the volatile capital goods segment, economists said the data confirmed the broad slowdown. The above expectation industrial production data strengthened the perception that with growth holding firm and food inflation on the rise again, the Reserve Bank of India will not pause in its policy tightening. Interest Rates Firm up Interest rates firmed up in the secondary market after the data release. The outlook could change as the central bank will have July’s industrial growth and August inflation data before it reviews monetary policy on September 16.Finance Minister Pranab Mukherjee said June IIP data was ‘encouraging’. Output of intermediate goods expanded only 1.9%, suggesting a drop in growth ahead, as these goods are used as inputs. Consistent with this indicator, output of consumer goods expanded just 1.6%, against 6.7% in May. Production of consumer durables expanded only 1%, a sign that high interest rates were beginning to dampen demand. Electricity generation rose 7.9% but mining lagged with just 0.6% growth. Consumer non-durables grew 2%. But aside from a few pockets of slowdown in rate-sensitive sectors, the economy has shown resilience so far. Exports rose 82% in July from a year ago; indirect tax collections were up 16.4% in the same month. Direct taxes had also grown by 26.63% over the first four months of the fiscal. The PMEAC expects services to expand 10% in the current year. The strong outlook has held up India’s growth forecast for the current year despite headwinds. While the government is still holding on to its forecast of 8.5% GDP expansion in 2011-12, most private forecasts are down to about 7.5%.