Are IIP numbers exaggerating the slowdown?

Robust PMI and corporate loan growth in November suggest all is not bad.

After the poor industrial production print in October, the 5.9 per cent growth in the November factory output is clearly good news. Given that several holidays were bunched in October resulting in fewer production days, the slowdown in factory output came in much worse than expected. For the first time since June 2009, industrial growth slipped into negative territory at -4.7 per cent in October. Consequently, November was expected to be better and the current figure confirms this.

While there is no doubt that industrial activity is slowing, as cost of production remains elevated, economists are finding it difficult to reconcile with the swing in manufacturing and electricity by industry group. Both manufacturing and electricity output for the month have rebounded sharply. Dhananjay Sinha, economist at Emkay Global, believes that if industrial activity has reversed so sharply, "This would also imply a rise in the capacity utilisation and significant bounce back in demand and pricing power which again is not reflected in the WPI data. This can happen only if there is big positive shock." The consumer goods growth for November stood at 13.1 per cent, which is also a contradiction to declining trend of previous 10 months. These month-on-month variance is becoming difficult to interpret; other indicators don’t seem to show such variance on a monthly basis.

By use, capital goods contracted by 4.6 per cent compared to the 26.5 per cent contraction in October. The consumer goods segment stole the show with a 13.1 per cent year-on-year growth compared to the 0.2 per cent growth in October.

To clean out monthly swings, economists are taking into account average growth over October and November to even out bumps. HSBC’s chief economist for India, Leif Lybecker Eskesen, said for a clean out of the Diwali effect, you can simply look at the average growth rate during October-November. This came in at just 0.6 per cent YoY, still notably slower than the average of 3.1 per cent YoY seen in the July-September quarter. So, growth is clearly slowing, although maybe not as much as feared, based on the preceding months' IIP data.

Indranil Sen Gupta, chief economist at Bank of America Merrill Lynch, sums it up: “While growth is certainly slowing, we increasingly think that data issues in industrial numbers could be exaggerating the slowdown by 25-50 basis points. After all, it is increasingly becoming difficult to reconcile, in any serious analysis, close-to-zero per cent industrial growth with the 20.9 per cent November industrial loan growth and a 54.1 December HSBC PMI.”