The index of industrial production (IIP) increased by 6.4% year-on-year in August 2015, higher than in recent months, but almost 75% of this growth is explained by just four items—gems and jewellery, insulated rubber cables, heavy commercial vehicles (HCV) and electricity, whose growth rates may not sustain at current levels.
At the same time, several other high frequency indicators do not necessarily support the picture of self-sustaining higher economic growth rates either. While credit growth remains at multi-year lows, we may continue to see higher growth rates in IIP in September and October 2015 as well because of high unsustainable HCV sales growth precipitated by pre-buying ahead of mandatory ABS (anti-lock braking system) implementation and overall low base effects from the past year.
An industrial revival needs a set of coordinated monetary and fiscal policies that remains missing. While meaningful structural reforms remain off the agenda for policy makers, an unduly high interest rate and over-valued exchange rate regime are hurting local industry and jobs as evident in the multi-year low of 5% credit growth to industry.
Of the 6.4% growth in the IIP, ‘Furniture, manufacturing n.e.c’ contributed 1.7%. Almost all of this growth is attributable to the gems-and-jewellery segment that saw an increase in production of 192% year-on-year and was a major driver of growth in the consumer durables segment. It is unclear whether the growth rate will be sustained given that exports of gems and jewellery increased by only 9.7% in August 2015. At the same time, domestic demand for gems and jewellery is unlikely to increase at a high rate given domestic demand indicators remain weak, as witnessed in consumer non-durables (up just 0.4% y-o-y), and other consumer durables such as two-wheeler sales in August 2015 remained static at August 2014 levels.
Electrical machinery & apparatus n.e.c. Contributed 1.9% of the 6.4%-growth in the IIP in August 2015. Almost all this growth was accounted for by the growth of 72% year-on-year in rubber insulated cable. That rubber insulated cable has been one of the main contributors to the growth in IIP as well as capital goods does not inspire much confidence in an industrial revival or revival of investment.
Motor vehicles contributed 0.61% of the 6.4% growth, mostly because production of HCVs for carrying goods increased by 40%. In fact, production of HCVs for carrying goods increased further by 75% in September 2015 aided by early buying before higher prices on account of the mandatory requirement of having ABS systems in HCVs kicks in. The high growth in HCV sales is unlikely on account of a recovery in economic activity as sales of Light Commercial Vehicles (LCVs) for transport of goods were static in August 2015 and declined by 7.3% compared with the corresponding months last year. At the same time, railway freight movement in August 2015 is virtually stagnant at last August level’s indicates a lack of broad-based economic revival.
Finally, an increase in the growth rate of electricity generation contributed 0.64 percent to IIP growth in August. This is a supply side phenomenon, is erratic, and is not indicative of increased economic activity leading to higher demand.
Thus, almost 4.9% of the increase of 6.4% in the IIP in August 2015 can be explained by just four groups—furniture, manufacturing n.e.c (1.7%), electrical machinery & apparatus n.e.c. (1.9%), motor vehicles (0.61%) and electricity (0.64%). As explained earlier, the current growth rates in these groups are unlikely to be sustained.
Capital goods sector in August 2015 has primarily been driven by rubber insulated cables and HCV sales that are not likely to sustain. At the same time, other indicators of investment such as cement and steel growth came in at low rates of 5.3% and minus 6.1% y-o-y, respectively. A sustainable pick-up in investment remains unlikely.
Meanwhile, non-food credit growth has weakened to a multi-year low of 8.4% y-o-y, and the abysmally low credit growth of close to 5-6% for industry and the services sector belies any hope of an economic recovery. In fact, it also calls into question the authorities claim of a real GDP growth rate of close to 8%. Credit to medium-size industry has declined by 5% y-o-y in August 2015. Personal loans growth reflects borrowing by individuals mainly for housing.
IIP may continue to show higher growth rates in September and October in y-o-y terms because of the large increase in HCV sales as prices for the same go up later this year. October overall production may show a high rate due to base effect as October 2014 as witnessed a sharp decline in IIP of 2.7%. One may be off the mark in interpreting recent increase in IIP growth numbers as an onset of industrial revival.
The author is co-founder of Marketnomix Research, and has worked as an economist with the International Monetary Fund