IIP: Telltale evidence of demand destruction

India released its Industrial production data for May on Thursday, after market hours. Not surprisingly, output for May contracted by 1.6 per cent on an annualised basis, as against an expansion of 2.5 per cent a year before and an expansion of 1.6 per cent in April.

I have been expressing concern about the impact felt by the small and medium industries for a long time now on account of falling demand and high input cost. However, it seems even the larger units are now feeling the heat as demand destruction continues. This became evident when the manufacturing PMI for May plummeted to 50.1 (a reading of less than 50 indicates contraction), the lowest since March 2009.

On a quarterly basis, India's industrial production had one of the leanest patches last financial year when growth in production in all the four quarters remained fairly subdued. Despite this, the inventory of India Inc accumulated at a fairly high pace in all the four quarters, clearly indicating the lack of demand.

History suggests such a high level of inventory accumulation is followed by falling capacity utilisation as producers prefer to draw down the inventories to meet any unexpected demand increase. Only after demand stabilises at higher levels do they start to ramp up production.

High interest rates and a slowing economy have also taken a toll on leveraged demand, as is evident from the performance of the consumer durable industry. Consumer durable production shrank by 10.4 per cent in May, the lowest since January 2009. Over the past six months, its production shrank each month by an average 5.8 per cent annualised rate.

This is not a surprise, since RBI data shows personal loan

 

s taken for the purchase of consumer durables have been contracting every month since January 2012. This trend was finally reversed in May this year, as the base effect kicked in, though the underlying weakness is palpable.

 

The author is a Delhi -based independent economist