OCT IIP - DISAPPOINTING AND DISCOURAGING

By Ruma Dubey

There was good news preceding the IIP which reinforced the belief that maybe, just maybe, we could see IIP for Oct come at a much better level. The Q2FY14 had brought in a lot of cheer so the hopes were up. Plus Diwali was in the first week of November so it was expected that we would see all the festive buys in October. Also core sector growth for the past three months was good though Oct core sector was a dampner.

But the contraction of 1.8% in October was much more disappointing, much more than what most analysts had expected. Manufacturing accounts for 76% of the IIP and its contraction of 2% is a cause for worry. Electricity falling MoM from 12.9% to 1.3% was also shocking. And while expecting festive season to have boosted demand, the 12% contraction in consumer durable is not encouraging.

The output of eight core sector industries had contracted by 0.6% in Oct, dragged down by coal, oil and gas sectors. This core sector contributes 38% to the IIP, so naturally, the impact on IIP was not expected to be positive. So if we had started talking about green shoots after Q2FY14 GDP, it looks like they were merely small weeds, which have wilted under the sun.

IIP is not about orders clocked or sales made; IIP measures production from various sectors. The weightage of IIP data is broadly divided into three segments – manufacturing (75.53%), mining & quarrying (14.15%) and electricity (10.32%). The numbers for IIP are usually released within 6 weeks after the end of the month. The figures are revised in the next and the third month based upon the revised Industrial production data furnished by the source agencies. The data is collected from Department of Industrial Policy and Promotion, Indian Bureau of Mines, Central Statistical Organization, Central Electricity Authority and 11 other agencies. 2004-2005 is considered as base year for calculation. i.e. the industrial output in 2004-2005 is considered as 100 index points. And it also takes into account micro, small and medium enterprises. Many economists say that data collection in IIP could be plagued with two problems – either data does not get collected every month and when it does get collected, it is all tallied up in one single month and thus the irrational volatility. Or else data is coming in from only a handful plants and then it is generalized for the entire sector.

With many factories closed for Diwali, which fell in Nov, manufacturing hit badly. Companies had most likely drawn on inventories, rather than increasing production. The sectors which showed the maximum fall were gems and jewellery, Boilers, sugar machinery, generator, Colour TV sets, Kerosene, commercial vehicles, earth moving machinery, telephone instruments and yes, pens of all kinds.

The sectors which showed positive growth were – ‘Air Conditioners (Room), Ayurvedic Medicaments, Steel Structures, Transformers (Small), Tractors, Razor Blades/ Safety Blades, Motorcycles, Dyes and Scooters and Mopeds.

To make matters even sticky, Nov CPI  was at 11.24% v/s 10.09% in Oct, came in at the highest over the past two years. Very uncomfortable numbers.

But immediately in the short run, things do not look good with lower IIP and much higher inflation. There is no doubt that going ahead, inflation will remain the focus for RBI. Already inflation is at an elevated level, and good monsoon would mean higher demand, good growth but higher inflation. RBI has stated that while food price pressures may ease with the arrival of the kharif harvest and the usual seasonal moderation, overall WPI inflation is expected to remain higher than current levels through most of the remaining part of the year warranting an appropriate policy response. RBI stated that it expects retail inflation is likely to remain around or even above 9% in the months ahead, absent policy action. RBI is expected to continue to maintain a hawkish stance and another rate hike on 18th Dec and later seems inevitable.

How do we get corporate confidence up? That has to be the biggest question and not whether or not RBI will reduce or increase rates. RBI has been doing its job very well, with absolute diligence but the laggard causing this failure is obviously the Govt.  Very real supply constraints have developed like in infra, mainly land acquisitions which does not require big bang reforms. The fall in manufacturing is alarming and this is a direct consequence of the fall in investments and many projects getting stalled.

Yes, UPA blames its fall in the four state elections on inflation and surely, pressure on RBI Governor has only gone up. But seriously, he can bring stability to the rupee but inflation, simply beyond RBI’s control... that’s more or less proven over the past so many months now.