May IIP growth slows to 11.5%

Industrial output in May grew way below markets expectations at 11.5%,hinting at a moderation in the pace of economic growth. With higher input costs getting factored in and the low base effect wearing off,economists are generally expecting growth rate to moderate further in the coming months.

Data released by the commerce ministry on Monday also showed the index of industrial production (IIP) for April revised downwards to 16.5% from the provisional figure of 17.8% released earlier. One should not expect industrial output to be abnormally high as there are capacity constraints in the economy, finance secretary Ashok Chawla said in the Capital after the figures were released. With the purchasing managers index showing the highest growth in the 27 months up to May,the markets were expecting higher industrial growth figures. A Reuters poll of economists had estimated IIP at the worlds second-fastest growing economy at 16%.

The major drag on headline IIP was capital goods output,which halved from Aprils figures. Growth in capital goods production is lumpy by nature and you cannot expect a 70% plus growth month after month, Jahangir Aziz of JPMorgan Chase told FE. The sharp drop in industrial production expansion is a blip and till the high base effect sets in during September,they are likely to remain in the double-digit territory, he added. Factory output showed an annual expansion of 12.3% in May,while mining and power generation grew 8.7% and 6.4% from the year-ago period. Moderation in the manufacturing sector expansion was due to slower growth in sub-sectors like food products,metals,machinery and transport equipment production. Economists believe the Reserve Bank of India (RBI) will go ahead with a sharp hike in key policy rates to tame inflation.