Factory output defies pundits, grows again

The country’s industrial production in July, as measured by the Index of Industrial production (IIP), rose 2.6% on-year, after having contracted for straight two months, positively surprising markets and providing a ray of hope in the dismal economic environment.

‘Surprising’ because economists were expecting an IIP contraction of 0.9%, according to a poll conducted by Bloomberg.

IIP had contracted 1.78% in June and by 2.81% in May.
The government also released the retail inflation data for August, which came slightly lower than the previous month. The Consumer Price Index (CPI) eased to 9.52%, compared with 9.64% in July, helped by moderated rise in food prices.

Back to factory output...  the manufacturing sector, which makes up 76% of industrial production, unexpectedly grew at about 3% in July, government data showed on Thursday, turning the tide for overall industrial production in the month. Electricity output jumped 5.6%, while mining output fell 2.26%.

“Export-oriented industries such as textiles, leather products, refined petroleum, chemicals and other transport equipment have managed to sustain positive growth,” said ratings agency Crisil in a report. These industries account for 37 % of the IIP manufacturing index and contribute about half of India’s total merchandise exports, Crisil said.

Apart from growth in export-oriented industries, strong rural consumption was another positive. Consumer non-durables output, accounting for 21% of industrial production and usually a proxy for rural consumption, went up 7%.

Whether the positive July IIP number is an indication of a turnaround will have to be watched, analysts said. The general narrative so far has been that India has been struggling with sluggish industrial output, hurt by red tape, unreliable fuel supply, outdated labour laws and stubborn raw material prices.

“The data is better than the earlier trend. We need a few more trends to confirm that the recovery in manufacturing is robust,” said Samiran Chakraborty, head of research at Standard Chartered Bank. “Even at 2.6%, it is not a very good industrial production number, if you look at it from a broader perspective. But I don’t expect it to go negative again.”

Many economists also cautioned against reading too much into the IIP data, given its volatile components. They pointed out that capital goods production, which accounts for about a tenth of industrial production, is the most erratic segment.

This time around, capital goods production surged as much as 15.6%. The momentum is not expected to continue in the coming months because the sharp rise in output was mainly driven by an erratic jump in cable and wire production.

“There is a big problem with the IIP data quality and should not be taken seriously. The underlying growth is still weak. The capital goods component is always volatile,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.

Crisil said while normal monsoon and consequent pick-up in rural incomes could aid a recovery in domestic demand-driven manufacturing industries going forward, a sustained revival of the manufacturing sector will be contingent on a pick-up in corporate investments.