Capital goods output contracts, durables sparkle

Bettering the street expectations, the Index of Industrial Production (IIP) recorded a growth of 3.7% during January 2011, showing a small improvement compared with the rise of 2.5% in December 2010 and 3.6% in November 2010.

This debacle stems from two basic causes — poor performance in manufacturing which has a weight of over 79% in the index and the exceptionally high growth of 16.8% a year ago, the so-called base effect.

Investment demand seems to have slackened during the month, judging from the massive contraction in the production of capital goods  — to (-) 18.6% from the whopping 57.9% in January 2010. However, in the case of consumer durables — and the entire consumer goods sector as well — the industry is clearly on the fast track.

The incremental increase was of the order of 23.3% in consumer durables, which is on top of an equally robust 28.2% a year ago. The trend is somewhat reassuring in consumer non-durables, in that the growth rate which was in negative territory 12 months earlier, now measures at a gratifying 6.9%.

On a monthly basis, it would appear that the industrial juggernaut is slowing down of late.  After a heart-warming 15.1% spurt in July 2010, there was a big let-up in the following two months; October saw a sharp rebound (12.1%), to be followed by three successive months of feeble growth. In the event, the average rate of increase in factory output during the period, April-January 2010-11, has decelerated to 8.3% from 9.5% during the same period of the preceding financial year.

Surprisingly, power generation during January 2011 showed a significant improvement over the same month of the previous year, the surge being 10.5% as against 5.6%.  But, mining had put up a disappointing show, with the rate of increase in production slowing down to a mere 1.6% from 15.3%.

In manufacturing, the incremental growth had slackened to 3.3% from 17.9% in January 2010.     

Thus, with two major sectors in the industrial index with a combined weight of almost 90%, faring poorly — and the hefty rise of 16.8% in the month of comparison, that is the base — the serious slackening in the tempo of industrial production during the month makes statistical sense.

From the use-based classification of the index too, the serious loss of momentum in output in three out of the four segments — basic goods (7.6% as against 11.5%), capital goods (-18.6% as against 57.9%) and intermediate goods (7.9% as against 22.2%) explains the setback in the factory sector’s performance.

However, undue pessimism is not warranted at this stage. The secular trend, after evening out the month-on-month changes in industrial production, is encouraging. The general index for the first ten months of the current year has registered an incremental growth of 8.3%, which, though less that what it was last year, looks respectable.

In particular, the manufacturing segment has fared well with a rise of 8.6%, even if it is lagging behind the previous year’s growth.
According to the use-based classification, a double-digit growth rate is evident in capital goods and consumer durables for the ten-month period of 2010-11 while consumer goods as a whole seems to have turned the corner with a somewhat faster pace of increase in production now as compared to the previous year - 7.1% compared with 5.9%.

In respect of intermediate goods, though a let-up is seen, the growth rate is very satisfactory at 9.1%. This is significant because it suggests that demand for goods that enter the final stage of production is strong and this may give a fillip to industrial growth in the coming months.