Industrial production outlook remains subdued

The index of industrial production (IIP) recovered to grow to an eight-month high of 2.1 per cent in June, but the outlook for sustaining this revival does not seem promising, particularly for July.

This is so because non-oil, non-gold imports fell about 10 per cent in July against over one per cent the previous month. This category of merchandise imports, represents industrial demand.

There is a high correlation between head of imports and industrial production. However, a small decline in these inbound shipments might not result in a fall in industrial production. For instance, a 3.48 per cent fall in non-oil, non-gold imports in May saw IIP grow 1.10 per cent. When the decline in these imports decelerated to 1.07 per cent in June, industrial production rose 2.10 per cent.

The rate of fall in non-oil, non-gold imports in the month of July at 9.87 per cent was the second steepest after 17.57 per cent in April this calendar year. IIP had declined 1.35 per cent in April.

 

CARE Ratings Chief Economist Madan Sabnavis said, non-oil, non-gold imports in July represent industrial stagnation. Even the months prior to this had witnessed industrial stagnation. "IIP grew only 2 per cent in June. It is a minor uptick. Stagnation is there as demand is too low," he said. Only government capital expenditure is increasing and people are spending on few items such as automobiles, Sabnavis added.

Capital output declined for the eighth month in a row in June, according to IIP figures. The contraction gathered pace at 16.5 per cent in June from 12.3 per cent in May.

Gross fixed capital formation (GFCF), a proxy for investment, has been subdued in recent times. It declined 1.51 per cent in the fourth quarter of 2015-16, against a meagre 0.83 per cent rise in the third quarter. In the second quarter, GFCF had risen 7.48 per cent after a 6.84 per cent increase in the first three months of the year.

However, as above normal monsoon and, implementation of the Seventh Pay Commission recommendations that are expected to push the rural and urban demand up, there could be some revival in IIP later.

ICRA Chief Economist Aditi Nayar said, "The manufacturing sector is likely to witness healthy volume growth, once rural demand picks up following favourable monsoon and sowing dynamics, and higher pay scales based on the pay commission's recommendations are rolled out."

However, Sabnavis said agriculture represents only 15 per cent of India's gross domestic product (GDP). As such, the rural demand would have to grow quite high for it to push up industrial growth.

Also, increase in the disposable income due to implementation of the pay commission recommendations would largely be spent on automobiles and real estate, Sabnavis said. The pay commission would cost the exchequer Rs 84,933 crore in the current financial year. Part of this would also go back to the exchequer in the form of taxes.

Sabnavis said the implementation of the pay commission recommendations will be positive, but would not fundamentally change IIP growth. While Nayar said the IIP is an old series with the base year of 2004-05, and may not capture the improvement in volume growth in newer establishments.

In its recent policy statement, the Reserve Bank of India (RBI) said the uneven performance of industrial output reflects the lumpy and order-driven contraction of insulated rubber cables, a component of capital goods. Excluding this item, industrial production rose 3 per cent till May in the current financial year. Capital goods production excluding insulated rubber cables expanded by eight in this period, it said.

IIP for the month of June had not been released during RBI's policy review earlier this month. In July, insulated cable rubber fell 84 per cent.

However, RBI pointed the subdued investment demand. "Nonetheless, the prolonged sluggishness in the capital goods sector is indicative of weak investment demand," it had said.