Important Components of IIP

After an encouraging 2.7% growth in the Index of Industrial Production (IIP) for the month of January 2017, the expectations were quite high for the month of February 2017. However, the overall IIP numbers disappointed the street with a negative growth of (-1.2%). Needless to say, it was manufacturing that applied negative pressure on the overall IIP number and had an oversized impact due to its 75% weightage. Despite positive growth from the other 2 components of mining and electricity, their overall on the impact on the IIP was not too high due to low weightage.

Key components of IIP; and how they fared in Feb 2017…

Of the three key components of IIP viz. Manufacturing, Mining and Electricity, it is manufacturing that has an overall weightage of 75.5%. Mining with 14% and electricity with 10.5% have a much lower impact on the IIP overall. For the month of February, mining showed a growth on the back of a positive mining policy adopted by the Indian government. Firm prices of commodities globally also aided the supply of most mined commodities. Electricity growth was almost flat at 0.3% due to challenges pertaining to electricity tariffs, supply of coal from Coal India and financial solvency of the State Electricity Boards (SEB).  But the big pressure on the IIP came from the manufacturing sector which saw negative growth of (-2.2%) and that was principally responsible for the negative growth in the overall IIP. In fact, the actual problem in manufacturing is evident when you consider that 15 out of the 22 industry classifications showed negative growth during February 2017.

What were the positive and negative triggers for the IIP?

Among industry groups, as mentioned earlier, only 7 out of the 22 groups showed positive growth in manufacturing compared to the previous February. Electrical machinery showed a growth of 17.4% while textiles and apparel showed a growth of 10.7% in manufacturing output. On the negative side, tobacco products showed a negative growth of (-42.8%) while food products showed a negative growth of (-20.6%). In both the above cases, the negative pressure was largely exerted by the impact of demonetization on rural and semi-urban demand, especially due to the impact of the cash crunch. In case of cigarettes, the fall in production was also due to the negative excise regime as well as the uncertainty over the GST rates.

The performance has been extremely positive in sectors where government support has been forthcoming. Classic case is steel! Despite the pressure on overall IIP, both stainless steel and Hot Rolled (HR) coils contributed immensely to IIP on the positive side. On the industrial side, sugar, cement bags and moulding machinery were the major negative contributors. In terms of user-based classification, basic goods saw a positive growth of 2.4% while capital goods saw a negative growth of (-3.4%). The capital goods space saw positive growth last month and hence that is a slight disappointment. It also implies that the revival in the capital cycle may now get back-ended a little longer.

The erratic journey of IIP over the last one year…

The IIP numbers on a monthly basis have been largely erratic over the last few months and that is largely explained by the volatile base effect. However the IIP for the full year 2016-17 is likely to be sharply lower than the previous financial year. The lower IIP number is critical from a few key standpoints. Here are a few of them…

•    The rapid expansion in liquidity in the banking system post the demonetization has not resulted in a really rapid expansion of credit or a positive impact on the manufacturing output. That may impel the RBI to overlook rate cuts as a means to push up production.

•    The IIP is a key component for overall GDP growth as well as for quarterly corporate top-line growth. If the tepid IIP growth sustains then the corporate top-line growth could take longer than anticipated. It also means that the aggressive target of 7.5% suggested by the RBI for the GDP growth next year could be slightly difficult to achieve.

•    However, one needs to remember that these are just one-off monthly numbers. There is definitely a pressure on the full year IIP and that is already factored into the overall GDP growth. How the remonetization impacts the revival in IIP and the expansion in bank credit gives a further push remains to be seen.