Economist Report : MAY 2015- INDEX OF INDUSTRIAL PRODUCTION ANALYSIS

MAY 2015- INDEX OF INDUSTRIAL PRODUCTION ANALYSIS

The quick estimates of the Index of Industrial Production (IIP) for the month of May were released on 10^th July 2015 by the Central Statistics Office (CSO). The base for IIP is the fiscal year 2004-05. The IIP as an index measures the growth in the activity levels of various sectors of the economy.

The index as compiled by the CSO reflects growth in the form of ‘Use-Based’ goods produced within the country as well as on the basis of the National Industrial Classification (NIC-2004).

The ‘Use-Based’ classification has been shown in Table 1 along with the weights assigned to each of the categories. The industries included in the NIC-2004 based compilation has been included in Appendix 1.

Table 1 IIP (Use Based)

CATEGORY	WEIGHT
BASIC GOODS	456.82
CAPITAL GOODS	88.25
INTERMEDIATE GOODS	156.86
CONSUMER GOODS
·         DURABLES	84.60
·         NON-DURABLES	213.47
IIP INDEX	1000.00

Basic goods includes items which are used as inputs (raw material) for a different number of industries. Items such as kerosene, which is consumed by poor households, Aviation Turbine Fuel (ATF; a major cost for airlines), coal, high speed diesel, pig iron and aluminium are also part of this category.

The capital goods category includes items that are directly related to the automobile manufacturing (internal combustion and diesel engines), construction sector (cranes, earth moving machinery), agricultural sector (agricultural implements, tractors), service industry (computers and peripherals) and the railways (coaches and wagons).

The intermediate goods category includes inter alia cotton yarn, dyes, plywood, printing ink, adhesives, explosives, automobile ancillary, gear boxes, integrated circuit chips and transistors.

The basic goods category registered a growth of 6.15% in May, 2015 as compared to the previous month. And As compared to May, 2014 too, basic goods output rose by 6.4%. The major constituents of this group include cement, electricity and diesel.

Going forward there is a possibility of incremental expansion in cement production in the country given the plans of the Union Government with regards to the development of smart cities and the launch of Pradhan Mantri Awas Yojana (PMAY) housing scheme, which aims to build around two crore houses. Although this bodes well for infrastructure, there are other underlying factors that need to be taken into account. The smart cities initiative would also drive demand for tiles and marble industries as more people shall work and live here.

One needs to be cautious as the recent Real Estate Regulatory Bill being proposed requires that that the developers deposit 70% of the amount collected from home buyers in an escrow account. The said amount could be utilized only for construction of the same project. This may increase the overall cost of funds for the developer as it is being argued that seventy per cent is too high a proportion, which shall unnecessarily lead to blockage of funds.

There is also an undercurrent suggesting that households are now moving their savings from physical to financial assets. Recently the government allowed Employees' Provident Fund Organisation to invest up to 5% of its ₹1 trillion funds in exchange traded equity funds. Given the recent upsurge in equity markets, people are parking their money in equity funds (domestic net inflow in have been the highest since 2008) and are avoiding real estate, where prices are cooling off. If this trend continues for the long term, it could impact growth in this category. Also real estate developers are piling on inventory due to lack lustre demand.

This weak demand impacted the top-line performance of companies in this sector for the last quarter of FY2014-15. This can be said to have contributed to the erratic growth of the basic goods index as shown in Figure 1.

Figure 1

Electricity has the second highest weight in the basic goods component. The uptick in the basic goods index can also be attributed to power production (Electricity output grew 6% in May). It is a healthy sign as with the government’s increased emphasis on urbanization, power output would only grow. In FY2014-15, the country’s per capita power consumption had risen to 1010 kilowatt-hour (kWh).

Power production would be crucial as India seeks to overtake China in the long term. (The per capita power consumption in China is around 4000 kWh). Solar power and other green alternatives could help meet the growing demand. Currently Punjab is planning to have 2,000 MW of solar power in place by 2016-17.

The capital goods component of the index registered a decline of 7.5% in May, 2015 as compared to April, 2015. The growth as compared to May, 2014 was just 1.8%. Commercial Vehicles has the highest weight under the capital goods category. A positive growth in the commercial vehicles segment would be an indicator of an uptick in demand as well as supply forces for goods and commodities.

The capital goods industry has remained more or less stable for the past twelve months. Figure 2 highlights this recent trend. But the further growth in the commercial vehicles segment would only be facilitated as and when infrastructure projects get going.

Figure 2

Going forward, lower input costs in the form of imported steel could significantly help the domestic commercial vehicle manufacturers. Prices of steel are going down as countries such as China continue to produce at the same pace in spite of lower domestic demand. The spike in March, 2015 can perhaps be attributes to the top line growth and the fact that the operating profit figure for commercial vehicle manufacturers turned positive for the first time in more than a year.

It is worth noting that according to the Automotive Dealer Confidence Index (ADCI), the index value for commercial vehicles was -27 indicating a moderately pessimistic view.

As far as intermediate goods are concerned, cotton yarn, non-cotton yarn and liquefied petroleum gas have the highest weights. The intermediate goods expanded 2.5% in May, 2015 as compared to the previous month and a 1.22% growth when compared with the same period last year.

Figure 3 illustrates the recent trend in the intermediate goods index. It has been on a continuous decline from May, 2014 to October, 2014. Post that growth has been mostly irregular. The decline can said to have been contributed by the cotton industry as its financial performance has been sluggish during the said period coupled with a decline in sales.

Figure 3

Going forward too, the prospects are not too bright as the inventory for cotton may reach high levels due to a revival in monsoon rains and subdued export demand. China has cut its imports amid rising stock piles and the resultant over supply may exert a downward pressure on prices. Further growth may only come from a rise in domestic demand.

The decline in intermediate goods can also be attributed to the decline of natural gas production by 3.1% in May, 2015.

As far as consumer durables are concerned, the major constituents are passenger cars, motor cycles and gems and jewellery. The consumer durables index registered a decline of 2.4 percentage points as compared to the previous month and a decline of 3.8 percentage points when compared to May, 2014. Figure 4 summarizes the recent trend.

 

Figure 4

The index has remained more or less stable with an upward tendency coming into the picture after December, 2014. Although there has been a slight decline, going forward the numbers may improve as demand for passenger vehicles picks up due to a reduction in borrowing costs. The index would also pick up as the rural demand for tractor picks up in wake of revival in monsoon (It would boost sales of components for the same like tyres).

As for the non-durables segment, the major constituents include sugar, rice, cigarettes, apparel and antibiotics. There was a decline of 5.1% in May as compared to the previous month whereas the figure was almost the same when compared to the previous year. The recent trend in this category is summarized in Figure 5.

Figure 5

As can be seen from the above graph the index did pick up in November, 2014 but remained flat thereafter. It has been on a decline since March, 2015. This could have been contributed by the current condition of the sugar industry, where prices have nosedived due to excess supply. In response the government recently raised the import duty on sugar to 40% from 25% levied earlier.

This is also reflected in the food and beverages index which declined 18% in May as compared to the previous month. Going further the trajectory of this index could have either an upward or a downward bias depending on how the kharif cropping season fares (It has been predicted that El-Nino could affect the southwest monsoon this time).

The tobacco industry rebounded with a 56.98% growth in May, 2015 as compared to April, 2015, but there was a 7.8% decline when compared to May, 2014. The unusual decline reported in April may have been temporary in nature and government efforts are yet to bear fruit.

Wood and products of wood & cork except furniture recorded a growth of 9.31% in May when compared to the previous month. The Coke, refined petroleum products & nuclear fuel industry registered a healthy growth of 16.38% in May, 2015 as compared to the previous month and a growth of 11.1% when compared with the same period in 2014. The growth in coal and nuclear fuel production should bode well for electricity generation in the country, which is critical to manufacturing. In fact electricity generation recorded a growth 10% in May as compared to April.

The basic metals industry also recorded a growth of 9.62% in May, 2015 when compared to May, 2014 but the growth as compared to the previous month was 3.27% which is also reflected in a less than enthusiastic growth of -1.4% in the motor vehicles industry.

The Office, accounting & computing machinery industry recorded a growth of 30.71% in May as compared to April but there has been a decline of 19% when compared with the same period last year. Even the thirty per cent growth registered has been due to an abnormally low activity in the month of April (The index had a value of 42). A slowdown in this sector could indicate a slowdown in other business activities in the country as well.

Keeping pace with the computing machinery industry, the Radio, TV and communication equipment & apparatus also declined 24.28% as this category also includes printed circuit boards used in computers.

The Electrical machinery & apparatus industry too recorded a decline of 19% when compared to the previous month and only 1.11% increase when compared to the same period last year.

The furniture manufacturing and gems and jewellery industry recorded a healthy growth of 11.2% in May, 2015 when compared with the same period last year.

Mining registered a growth of 2.8% in May, 2015 as compared to May, 2014 and an increase of 4.89% when compared to April, 2015. Manufacturing activity as a whole declined by 0.84% in May, 2015 as compared to the previous month.

Four out of the eight core industries performed fairly well in the month of May with production of refinery products, fertilizers, steel and electricity registering 15.3%, 15.1%, 15.1% and 10.2% respectively when compared with previous month. But when compared with the same period last year the growth figures are less than 4 per cent except for refinery products, which registered a growth rate of 7.3%.

Overall it can be said that the basic goods industry, along with the four core industries of refinery products, fertilizers, steel and electricity registered a healthy growth. But there is perceptible slackness in particular industries such as capital goods, consumer durables and non-durables. Going forward the growth would be contingent on infrastructure development as well as the progress of the monsoon rains.

REFERENCES

1.      http://businesstoday.intoday.in/story/equity-fund-inflows-near-record-as-retail-investors-return/1/222003.html

2.      http://timesofindia.indiatimes.com/business/mf-simplified/mf-news/Mutual-funds-bullish-on-EPFO-move-to-invest-in-equity-funds/articleshowhsbc/48183939.cms

3.      CMIE

4.      http://auto.economictimes.indiatimes.com/news/industry/automotive-dealer-sentiments-turn-positive-except-in-commercial-vehicle-segment-report/48160645

5.      http://www.livemint.com/Industry/jqvJpYRpSNyldcuUlZrqQM/Indias-per-capita-electricity-consumption-touches-1010-kWh.html

6.      http://www.tribuneindia.com/news/punjab/state-to-generate-2-000-mw-solar-power/110612.html

APPENDIX I

IIP-MAJOR INDUSTRIAL GROUPS

1.      Food products and beverages                                                      

2.      Tobacco products                                                 

3.      Textiles                                                     

4.      Wearing apparel; dressing and dyeing of fur                                                       

5.      Luggage, handbags, saddlery, harness & footwear; tanning and dressing of leather products                                            

6.      Wood and products of wood & cork except furniture; articles of straw & plating materials                                               

7.      Paper and paper products                                                

8.      Publishing, printing & reproduction of recorded media                                                  

9.      Coke, refined petroleum products & nuclear fuel                                               

10.  Chemicals and chemical products                                                

11.  Rubber and plastics products                                                       

12.  Other non-metallic mineral products                                                       

13.  Basic metals                                                         

14.  Fabricated metal products, except machinery & equipment                                                        

15.  Machinery and equipment n.e.c.                                                  

16.  Office, accounting & computing machinery                                                        

17.  Electrical machinery & apparatus n.e.c.                                                   

18.  Radio, TV and communication equipment & apparatus                                                  

19.  Medical, precision & optical instruments, watches and clocks                                                    

20.  Motor vehicles, trailers & semi-trailers                                                    

21.  Other transport equipment                                                           

22.  Furniture; manufacturing n.e.c.                                                    

APPENDIX 2

 

 

ABOUT THE AUTHOR

This report has been made by Tarun Vasnani, a final year MBA student at the Institute of Management, Nirma University.

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