IIP growth likely to slow at 1% in June

India's industrial output grew at a slower pace in June, hobbled by weak investment at home because of policy inaction and a drop in export orders from the United States and Europe, a Reuters polls showed on Tuesday.

The expected deceleration suggests that Asia's third largest economy remains on a slowing course and that a pickup in the pace of factory production in May following a contraction the previous month may have been a blip.

The Index of Industrial Production (IIP) rose an annual 1.0 per cent in June, compared with 2.4 per cent in May, according to a poll of 25 economists. Forecasts ranged from a decline of 2.7 per cent to a rise of 2.5 per cent.

Industrial output accounts for a little over 15 per cent of Gross Domestic Product (GDP) and the consensus points to more weakness ahead for the Indian economy which grew at its lowest annual rate in almost a decade, just 5.3 per cent in the quarter to March.

"There is nothing really that we can see that would have driven any kind of trend or improvement or any sort of turning point in the weak industrial cycle," said Robert Prior-Wandesforde, the director of Asian economics at Credit Suisse in Singapore.
"The weakness in key trading partners is hampering exports which is a key driver in industrial production."

In April, India's industrial output contracted by 0.9 per cent, according to revised figures issued by the government after an initial estimate of flat growth.

The industrial output data is notoriously volatile but is still taken as a barometer of economic growth.

FALLING EXPORTS

Europe's economic woes, triggered by a festering debt crisis, left Asian factories reeling in June, data from private surveys of purchasing managers showed.

After recording strong growth for much of last year, India's exports tanked 5.45 per cent in June, with officials attributing weak demand in the United States and Europe for the fall.

Infrastructure output, which accounts for over a third of factory production, grew an annual 3.6 per cent in June, slower than a revised 4.0 per cent in May.

Steel, natural gas, crude and fertilizer production among the eight core industries in the infrastructure sector contracted in June and economists said poor performance in these industries could weigh on overall output numbers.

Investment in Indian factories has also fallen with a sharp reduction in spending on capital goods - a key indicator which has shown growth only once in the past 9 months.

India's economy has been throttled by a combination of high inflation, tight monetary policy, weak global economic conditions and the lax implementation of fiscal policies and reforms in the past few years.

The government's inability to push through long-pending policy reforms, such as foreign direct investment in the supermarket and airline sectors, has hurt confidence for investments in India.

"Investor confidence is lacking and the market has put a lot of weightage on some announcements on reforms by the government but outlook in policy reforms is still uncertain," said Amy Zhuang, senior analyst at Nor dea.

Copyright Thomson Reuters 2012