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Index of Industrial Production

 

Sept IIP drops to 1.9% yoy from 3.6% in Aug, a two-year low


Industrial production growth in Sept at 1.9% yoy was much lower than the median consensus forecast of 3.6%. The growth was pulled down by Mining sector but Manufacturing also slowed. Within use-based, Capital goods declined, Intermediate goods growth remained low, Basic goods moderated and Consumer goods did not go up as much as expected during pre-Diwali inventory restocking. For Apr-Sept period, IIP grew at 5% lower than 8.2% during the same period last year.

Economy Update
Growth was pulled down by decline in Mining while Manufacturing slowed:
  • Manufacturing output, with higher weightage in IIP, rose by only 2.1% yoy in Sept’11 vs 4.1% in Aug’11. Within manufacturing, 15 out of 22 industry groups showed positive growth compared to 11 the previous month. The industry group ‘Radio, TV and comm equipment’ showed the highest growth of 25%, followed by 19% in ‘Other transport equipment’ and 16.6% in ‘Office, accounting & computing machinery’. Manufacturing increased by 2.2% over the month
  • Growth in electricity was robust at 9% yoy in Sept but lower than 9.5% in Aug. The mining sector contracted by 5.7% yoy (vs. -4.1% in Aug’11) as seen in core sector growth. On month over month basis, Electricity and Mining both declined by 3.5% and 4.9% respectively

Within Use-based classification, Capital goods declined, Intermediate remained at very low level, Basics moderated, Consumer goods did not increase as expected:
  • The Consumer goods increased by 3.5% yoy in Sept’11 (vs 2.3% in Aug’11) driven by Consumer Durables at 8.7% (vs 5.5% in Aug) while Consumer Non-Durables declined by 1.3% (vs -0.6% in Aug’11). Consumer Durables growth did manage to improve in Sept as is usually seen in pre-Diwali month due to inventory restocking but the growth was much lower than historical trend
  • Basic and intermediate goods production, associated with inventories, grew at 4.5% and 1.5% yoy in Sept respectively vs 5.2% and 1.9% in Aug. On month over month basis, Basic and Intermediate goods both contracted by 3.3% and 2.0% respectively
  • Capital goods, indicating fixed capital investment, contracted by 6.8% yoy vs +4.1% in Aug’11. On monthly basis, it grew at 9.2%

Bottom Line:
  • Industrial production is clearly moderating suggesting sluggishness in the GDP growth. The lead indicators like Passenger car sales, credit growth, PMI data, port traffic, export growth are all pointing to slow down
  • Consumer durables growth improved but failed to be robust as is seasonally observed before festivals – lagged impact of monetary tightening. Investments have not shown any sign of pick up. Intermediate goods which are a good lead indicator of Capital goods or investments remained weak for the fifth consecutive month.
  • The Industrial production in Oct will be flat to negative with very high base, lower working days and slowing growth
  • Impact of RBI’s tightening last year is being felt now. Quarterly GDP growth will be moderating. This will have serious implication in terms of meeting the target of Centre’s budgeted revenue collection as Corporate tax, Excise and Custom duty collection decelerates. This will increase fiscal deficit and hence market borrowings
  • Some major Central banks have cut rate on deteriorating global outlook. But RBI will not be able to act with inflation staying at the same elevated level.
IIP growth in Sept’11 The year over year growth of IIP


The month over month growth of IIP



PMI and IIP HSBC’s PMI Manufacturing (Purchasing Managers Index), which is considered a lead indicator for Industrial production, had improved in October compared to Sept but still remained below the long term average. In the graph below, IIP growth (% yoy, 3 month moving average) is plotted against PMI Output with PMI leading IIP by a month. The graph shows that going forward, IIP numbers should remain muted.

IIP – in Charts

Sept IIP at 1.9% yoy was at 24 months low; it was considerably below consensus expectation
  • The IIP growth in Sept at 1.9% was below the Bloomberg median consensus forecast of 3.6%
  • On month over month basis, IIP grew by only 0.9%
  • For FY12 (Apr-Sept), IIP growth was at 5% yoy, lower than 8.2% during the same period previous year

Core sector growth for Sept at 2.3%, the lowest in two-and-a-half years Index of eight core-infrastructure industries having a combined weight of 37.9% in IIP logged 2.3% in Sept
  • The Core infrastructure sectors growth slowed in September - dragged down by decline in coal, natural gas and fertiliser output


Non-oil imports and credit growths have moderated

Manufacturing, the big boy of IIP with 75.5% weightage, grew at 2.1% in Sept vs 4.1% in Aug

3 month moving average of IIP in Sept at 3.1% was lower than 5.6% in Aug IIP growth was pulled down by Mining sector growth while Electricity was robust Mining and Electricity (%yoy 3 mma)

Consumer Durables grew at 8.7% yoy in Sept vs 5.5% in Aug, a pre-Diwali impact
Domestic Passenger car sales had the steepest monthly decline in over 10 years in Oct on supply disruption in largest car-maker Maruti Suzuki due to labour trouble, coupled with high interest rates and fuel prices. Consumer Goods (3mma, %yoy)
Capital goods remained volatile; contracted by 6.8% yoy in Sept after growing at 4.1% in Aug’11

Capital Goods (%yoy) Trend in Basic & Intermediate Goods (3mma, %yoy) Decreasing momentum in intermediate goods does not bode well for Capital Goods sector

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