Wednesday 12 March 2008

IIP nos disappoint: Blame it on manufacturing

January industrial growth stands at 5.3% as against 11.6% (YoY). Analysts expected a January growth at 7.7%. December industrial growth has been revised to 7.7% as compared to 7.6%, provisionally.

January capital goods growth has come out at 2.1% versus 16.3% (YoY). While the January consumer durable output is down to 3.1% as against 5.3% (YoY).

The number coming in at 5.3% is a huge disappointment. For the quarter January-February-March, it was expected that the average would come in may be between 7-8%. If bang in the first month you have got 5.3% then the base effect will make February-March look equally ugly that’s what analysts will start asking themselves. In the composition of IIP, a significant portion is accounted by manufacturing, which has come in at 5.9%, another multi-month low compared to 8.5% that was notched up in December. So, it is quite clearly manufacturing that is the culprit. In manufacturing, capital goods is the biggest disappointment.

For the last three-four years, capital goods have come in with double-digit growth. The only aberration was October 2006 when it came in at about 6.5%. But October 2006 was an aberration for the entire IIP basket, not just for capital goods. Analysts would like to believe that this month 2.1% is also an aberration. If you have grown in double digits for the last three years, you can’t drop to 2.1% just like that. This is not a fashion industry. Capital goods don’t go in and out of fashion in a month, it is not a consumer durable, it’s not even susceptible to seasons or monsoons. So, there seems to be some kind of case to be made that this is an aberration.

One will wait for some kind of final numbers to come in. The IIP numbers are usually revised as more data comes in. So, perhaps when February numbers are announced, you will see the capital good numbers and January IIP numbers getting revised upwards. That’s the belief at this point in time. Economists are not as yet revising their full year IIP numbers. It will be wait and watch but with caution.