The February IIP data showed that industrial activity had contracted by 1.2 %, continuing the contractionary trend over the past few months. We will let the attached chart do the talking (note that the growth numbers are 4 month moving averages) on the segment-wise numbers. We will provide instead an account of the limitations that analysts face in understanding the realities behind these numbers and then an anecdotal substantiation of the numbers in the IIP. This will convey a composite picture of the environment.
Multiple sources are used to assemble the giant jigsaw puzzle, using data from multiple industry associations, government sources, ministries and others. Some industry data is available in detail with a minimal time lag: automobiles, cement, steel and a couple of others, which provide a forewarning of the IIP numbers, which follow a month later. In India, unfortunately, most industry associations remain quite fragmented and have very little data available. The lack of depth of understanding is immediately perceptible on reading newspaper of the IIP data.
The following paragraphs provide some anecdotal evidence that might help the reader get a better appreciation of the IIP numbers. Remember that there are also some statistical quirks in the data; the base effects of the growth rates of the previous year, which mask or render ambiguous a correct interpretation of the industrial activity.
Consumer goods had been one segment where growth was holding up in the early months of 2008, even as capital goods and intermediates segments were slowing down. However, even the moderate growth in consumer goods (mostly due to a higher growth in consumer durables), was partially due to the negative growth in this segment last year. In addition, in February, the government announced a cut in excise duty from 10% to 8% and service tax from 12% to 10% as a part of its third stimulus package. Companies like LG, Samsung were amongst the first to announce price cuts. The auto sector is likely to see a mild recovery in the coming months. Consequently, growth in various supporting industries such as glass and rubber will see an improvement. These are the components of the intermediate goods segments. As the chart shows, this segment has been the worst affected by the slowdown.
The capital goods segment is followed with much interest, since there is apparently the belief that this segment will determine the fortunes of the country going ahead. As the chart shows, growth has been quite robust, even during this period when one would have thought that investment pipelines would have shrunk rapidly. Significant growth came from the machinery and equipment segment. One reason could be the recent capacity additions in the power sector. For instance, Corrtech International completed its Rs. 40 crore gas turbine compressor blade expansion project, which is now operating at full capacity. Also JCB India, completed its Rs. 300 crore construction and earthmoving expansion project at Ballabhagarh.
Momentum in the large basic goods segment had also been slowing steadily since mid-2007. Most of this slowdown is from the mining and electricity segments. Cement output, however, has been quite strong for most of 2008. This demand is presumably being driven by increased government spending on infrastructure projects, which is also likely to keep demand high in the coming months. The Aditya Birla Group and ACC, for example, have reported good growth in their cement production for March 2009. A spurt in auto sales and thrust to infrastructure projects have led to increased demand for steel. Tata Steel reported a 17% rise in its crude steel output while JSW Steel has reported a 28% YoY increase in its March 2009 output.
One major lacuna in industrial statistics in India is timely availability of data on inventories and capacity utilisation. The one that we think is the most reliable is the Industry Outlook Survey of the RBI, (an update on expectations for the April?June quarter will be available just before the RBI?s monetary policy statement in a couple of weeks). Inventory data on a monthly basis is available for only a few industries. Capacity utilisations are estimated using only heuristics.
That the IIP data reflects ground realities is indubitable. Exports are down, job losses and discriminating consumer credit are impacting retail demand, higher inventories are leading to cutbacks in production lines, receivables cycles have lengthened and cash flows squeezed. But we still seem to lack much clarity, not just on the sequence of impacts on industrial and service activity from the global slowdown, but also the details of the ways in which sectors which have been affected. The broad classifications of the IIP have ceased to be of much help in understanding the minutae of the slowdown; we understand the segments and regions which have been affected by the slowdown, but much more granular details are needed of logistics, finance, taxes, employment, inventories, capacities and capex plans involved. We need this clarity on the dynamics of this slowdown if the multiple thrusts of policy stimuli have to be targeted effectively for the maximum impact.
The author is vice-president, business & economic research, Axis Bank. These are his personal views