Decoding IIP decline: Recovery continues to be weak; watch out for inflation

There is one unambiguous message from the industrial production growth figures for November that came out yesterday – to not get too excited or too disappointed with monthly numbers.

Just about one month back, there was general rejoicing over a 9.8 per cent jump in factory output in October, riding on the back of a 10.6 per cent growth in the manufacturing sector. And now there is gloom that, in November, manufacturing production declined 4.4 per cent, dragging down overall industrial production, which saw a drop of 3.2 per cent.



But in spite of this slump in one month, the good news is that factories appear to be doing better than last year. Overall industrial production grew 3.9 per cent in April-November 2015, against 2.5 per cent in the same period the previous year. The manufacturing sector too did better in 2015 (3.9 per cent in April-November) than in 2014 (1.5 per cent in the same period).

The 10.6 per cent spike in manufacturing growth in October was actually the result of a base effect – production had declined 5.8 per cent in October 2014. The 4.4 per cent drop in November was partly the result of the floods in Chennai, which is a major production centre. The effect of the floods may carry over into December manufacturing production figures as well. So next month may also not bring happy tidings on this front.

But has industry really turned the corner, as the growth figures for the first eight months of this financial year seem to suggest?

There are still signs of worry. The bellwether capital goods sector has been seeing a lot of fluctuation, and, at 4.7 per cent, growth in April-November 2015 was lower than the 4.9 per cent logged in April-November 2014. So clearly, new capacities are not coming up. Imports are not filling the gap. Import figures for November show significant decline – between 15 per cent and 46 per cent - in a range of raw materials, intermediate and capital goods.

The consumer-oriented sectors also present a mixed, even confusing, picture. The overall consumer goods sector did better in April-November 2015 (4.1 per cent) against April-November 2014 (minus 5.7 per cent), and so did the consumer durables sub-sector (11.9 per cent versus minus 15.9 per cent). But let us not forget the base effect.

The durables segment (household appliances etc) has been marching slowly back to recovery after the consistent decline in production since October 2013 touched rock bottom with a 35 per cent drop in October 2014.

Since then the extent of production decline has been reducing gradually and from June 2015, the segment has seen double-digit growth, barring an 8 per cent growth in September. Production growth in November was 12.5 per cent.

Expecting an inventory pile-up after the festival season, Devendra Pant, chief economist at India Ratings, was not expecting a jump in production in November. This, coupled with the growth in excise collections, he says, is a sign of consumer confidence picking up.

But how does this square with the performance of the consumer non-durables sub-sector (toiletries, cosmetics, processed foods and a range of other consumables), where production has declined 0.5 per cent from a 1.8 per cent growth over the same period.

How is it that a segment that saw production dip only twice through 2014-15 has recorded decline in five of the first eight months of this fiscal? These are items of non-discretionary spending (which means one doesn’t cut back on these hugely when finances are tight) and have not seen much inflation.

A Crisil note on the consumer price index numbers for December, which were also released yesterday, show that inflation in household care and effects has been below 4 per cent for eight months between March and December and in the 4-6 per cent range in two months (June and November).

Inflation in the household goods and services sector has remained in the 4-6 per cent range since March. So the consumer goods production data needs a closer examination.

Will the uptick in industrial production egged on by consumer demand sustain? A lot will depend on how inflation plays out. Retail inflation has been steadily inching up since August and touched 5.6 per cent in December, the highest since September 2014. This has been driven mainly by food prices – food inflation in December was 6.4 per cent, after remaining below the 6 per cent mark from April to November.

Food inflation was driven mainly by pulses, where inflation remained in the above 40 per cent range despite an improvement over the previous year. Inflation in prices of oils and fats and vegetables has been inching up, since July and September, respectively. Continued food inflation could affect consumer spending and perhaps industrial production.

So clearly any industrial revival is still very nascent and, as finance minister Arun Jaitley starts preparing this third budget, he will have to see how best he can nurture this.

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Updated Date: Jan 13, 2016 09:30:41 IST

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