My Comment in Business Standard

Monday, Aug 11, 2008

Industrial production likely to improve in June: Analysts
Bs Reporter / New Delhi August 11, 2008, 0:10 IST

Production output from factories in June is likely to improve with annual growth seen at 5-7 per cent as against 8.91 per cent in the same month last year, according to economists. The June data for the Index of Industrial Production (IIP) is to be released on Tuesday.
In May, the IIP grew 3.8 per cent due to dismal performance by the manufacturing sector.
“IIP growth is likely to be close to 5 per cent in June, which is an improvement from the previous month. However, the overall IIP growth is likely to remain subdued,” said Shubhada Rao, chief economist, Yes Bank.

Rao said the production growth in core industrial sectors like electricity remained subdued in June while that of crude oil declined. Moreover, due to a high growth of around 23 per cent in the capital goods sector in June 2007, growth in the sector is likely to soften this June.
According to an analysis by Saugata Bhattacharya, vice-president, Axis Bank, IIP growth in June is likely to be 5-7 per cent. However, the bank’s CLI (Consolidated Leading Indicators) suggests that industrial growth is likely to fall in July.

“Bank credit growth, for instance, has been increasing significantly since April, although a significant part of this is likely to have been short-term credit to oil-marketing companies (which seems to have been corroborated by the RBI data up to May),” said Bhattacharya.
“Although there is no clear idea of the relative contribution of this short-term credit on the growth rate, the overall effect of credit growth on the CLI level is clearly overstated. There was also an uptake in cement dispatches, which probably resulted in more railway freight movement in June, which is taken as a signal of logistics support. Currency with the public, an indicator of purchasing power, has also been increasing since April,” he added.

Comment
anjalir on 11-AUG-08
No doubt based on the above discussion the IIP may rise but the rising interest rates and high cost of inputs cannot be ignored. In a rising interest rates scenario, where easy money gets wiped out (thanks to equities turning unattractive), banks also turn stringent while lending to companies. continue...
anjalir on 11-AUG-08

For now, the fact that the prime lending rates (PLR), at which companies typically borrow from banks, have shot up and currently hover at about 15-17% as against the 12-13% 3 years back is a matter of concern. this increases the cost of production which leads to higher selling prices thus low demand and finally low production as there is no or very less demand. Also the rising interest rate reduces purchasing power and thus low demand n resultant low production.
anjalir on 11-AUG-08