Making sense of IIP

How the furniture manufacturing segment grew an astounding 69.9% in September despite slowdown in the real estate sector

The anomalies in the Index of Industrial Production (IIP) continue to bewilder. Consider the furniture manufacturing segment. The segment which has a weight of three per cent in the IIP grew by an astounding 69.9 per cent in September according to latest data released by the Central Statistical Organisation (CSO). From April to September 2015, it grew at 49.5 per cent.

By contrast, IIP grew only 3.6 per cent in September, compared to four per cent in the April-September period. Manufacturing, which accounts for roughly 75 per cent of the IIP, had grown even lower at 2.6 per cent in September.

Even this sluggish growth seems to be driven only by a handful of segments.

Of the 22 sub-sectors in manufacturing, 11 contracted in September, while five grew at rates lower than the aggregate 2.6 per cent growth registered by the manufacturing sector.

Only six sectors — furniture manufacturing (69.9 per cent), motor vehicles (8.6 per cent), electrical machinery (21.6 per cent), chemical products (9.8 per cent), wood products (3.5 per cent) and tobacco (8.9 per cent) — have grown at rates higher than the aggregate growth of the sector.

This suggests the headline numbers are masking the underlying weakness in the broader economy and are being driven up only by a handful of segments.

Notably, there has been a sharp slowdown in corporate earnings, Bloomberg consensus estimates of Sensex earnings per share (EPS) for 2015-16 and 2016-17 have been steadily falling, and there has been a sharp slowdown in the real estate sector. Given these, the high growth in the furniture segment would seem perplexing. What explains this paradox?

One possible explanation for this high growth could be attributed to what economists call stock building.

Ahead of the festive season, companies typically pile up their inventory in anticipation of a surge in demand.

But it is difficult to accept this explanation as the segment has registered high growth throughout this financial year, not only in the months leading to the festive season.

The segment grew 49.5 per cent from April to September in the current financial year. Further, given that the overall economic growth remains sluggish, it is difficult to believe corporate entities anticipated a sudden surge in household demand.

Another possible explanation, according to Aditi Nayar, senior economist at ICRA, is that the furniture manufacturing category includes some components of the gems & jewellery segment. Growth in the gems & jewellery segment, which accounts for a significant share of India’s export basket, could be propelling the growth of the overall furniture manufacturing category.

Increase in demand from new age entrepreneurs is another likely explanation put forth by Madan Sabnavis, chief economist at Care. According to Sabnavis, the demand for these products typically comes from three segments – households, corporates and the government. But in the current economic environment given that spending of all the three segments has been curtailed, an increase in demand seems unlikely. Sabnavis contends that it is quite likely that the additional demand could be coming from the new age start-ups, which are rapidly expanding.