IIP: Devil's in the fine print

Factory production above expectations, but growth unlikely to sustain.

India’s factories have been chugging along in March, despite rising rates and slowing demand. Industrial production for March stood at 7.3 per cent, which is in contrast to the low growth rate scenario witnessed since November 2010. For the entire year, industrial production growth was 7.8 per cent, as against 10.5 per cent in FY10. While economists were expecting IIP numbers for March to grow 4 per cent, the higher figure has come as a big surprise.

A big driver of this increase in factory output has been the manufacturing sector, up 8.1 per cent compared to 11 per cent last year. But, this growth has not been replicated across different industry groups. While activity slowed in mining, consumer goods and durables, electricity production rose at a faster clip.

But is this growth in industrial production sustainable? Clearly not, as the larger concerns around industrial activity remain. The evidence of this comes from the softening in growth of consumer goods, which softened 7.7 per cent year-on-year against 11 per cent in February. Consumer durables recorded 12 per cent growth, compared to 23 per cent growth in February. Explaining the road ahead, Leif Lybecker Eskesen, chief economist for India & ASEAN at HSBC Global Research, says: “We expect industrial production to slow after the strong recovery in FY11. Today’s softer reading for consumer goods production is an early sign that this is already taking place.” This is perhaps exactly what the central bank wants, as it’s widely perceived that inflation is mainly due to demand-led pressures.

Siddhartha Sanyal, chief India economist at Barclays Capital, believes the March industrial production number has perhaps benefited heavily from the strong export performance since December. The absence of the widely expected increase in excise rates in the Budget (28 February) might have played a positive role and helped push up growth rates. Despite better-than-expected growth in March, it is unlikely that industrial production will return to double digit growth rates anytime soon. The intermediate goods segment — which is generally a good lead indicator for overall IIP — has weakened further in March despite the strong overall growth in industrial production. Certain other lead indicators such as auto-sales have turned softer in April compared to recent months.