What poor March IIP data means

The index of industrial production or IIP fell 3.5 per cent against a forecast of 1.5 per cent growth. This has spooked the stock market as the BSE Sensex and NSE Nifty fell over one per cent. The fall is the first such since October 2011. For the full year 2011-12, the IIP grew 2.8 per cent against 8.2% in 2010-11.

Read full story here. Watch expert comments on March IIP data here

Here is what it means:

• Slow growth: Expect moderate revival in growth for the first half of 2012-13 at best. The purchase managers’ index (PMI) and credit growth data show some signs of a pick-up. Consumer demand is expected to stay flat as they put off major expenses. All this means slow growth going forward.

• Weak manufacturing and jobs growth: The manufacturing sector growth fell 4.4 per cent while the mining sector growth fell 1.3 per cent. The electricity production growth was 2.7 per cent, lower than 7.2 per cent in the year ago period. Overall core sector growth slipped to 2 per cent in March against 6.9 per cent in February, a leading indicator of slower factory growth. This means businesses are either finding it difficult to increase production or they are simply pushing back major expansion. This could mean fewer jobs going forward. 

• RBI will not cut rates rapidly: In an environment of slow growth, the Reserve Bank of India would be expected to cut interest rates and stimulate growth. But the RBI is in no position to offer that support. On the one hand, inflation refuses to cool down and is expected to hover around 6.6 per cent in April 2012. RBI has already cut key rates by 0.5 per cent. On the other, it is also battling a falling rupee. This means limited scope for an interest rate cut.

• More government action needed: The government needs to push for reforms and consolidate the fiscal situation by putting a cap of expenditure. “We are in a bind as far as the fiscal policy is concerned. Therefore, right now it is more important to clear the pending legislation and push decision making, which can boost the industrial production numbers,” Indranil Pan, Chief Economist, Kotak Mahindra Bank, told NDTV Profit.

• Weak stock markets: Capital goods and infrastructure shares fall were the hardest hit as a result of the weaker-than-expected IIP data. The BSE Capital goods index fell 1.22 per cent. Infrastructure dependent companies took a knock. Share prices of GMR, IVRCL, Lanco Infratech fell over 5 per cent on Friday and were among biggest losers. This indicates a weak outlook for companies in the infrastructure space. The overall sentiment in the market is hurt adversely as manufacturing growth is important for profits earned by a large market heavyweight companies.