IIP Dec 2011 - Pace of growth slows to 1.8% from 5.9%: ICRA

ICRA has come out with its report on Index of Industrial Production December 2011: Pace of Growth slows to 1.8% from 5.9% in November 2011.

The Index of Industrial Production (IIP) recorded a sluggish 1.8% growth in December 2011, considerably weaker than the 8.2% growth in December 2010, with a weaker performance across all the use-based categories except consumer non-durables. In particular, capital goods underwent a contraction for the fourth consecutive month, with a steep 16.5% de-growth in December 2011 (vs. a 20.2% growth in December 2010), whereas intermediate goods displayed a contraction of 2.8% in the same month (vs. an 8.1% growth in December 2010). Basic goods and consumer durables expanded by a modest 4.0% and 5.3%, respectively, in December 2011, suggesting that demand for final goods remains moderate. However, the double-digit expansion of consumer non-durables for the second month in a row (14.4% in November 2011 and 13.4% in December 2011) suggests some revival in consumer spending on non-durable items, following a moderation in food inflation.

As anticipated, IIP growth declined in December 2011 relative to the 5.9% growth recorded in November 2011; the latter had benefitted from factors such as a benign base effect and spurt in production levels following fewer working days in October 2011 related to the festive season, amidst others. However, the pace of expansion in December 2011 at 1.8% was slower than our expectation of a 3.1% growth, primarily led by a sharper than expected contraction in capital goods.

Various temporary factors aided in the slowdown in industrial growth in October 2011 (contraction of 4.7%) and the rebound in IIP growth in November 2011 (5.9%), such as the shift in the festival calendar, the Telangana agitation etc. Accordingly, it may be more instructive to analyse the trends in December 2011 relative to the average growth over the previous three months. Initial data confirms that the performance of the industrial sector remained lack-lustre in December 2011, with IIP growth at 1.8% as compared to the 1.1% growth recorded over the previous three months.

In terms of the sectoral classification, IIP growth in December 2011 was led by a 9.1% growth of electricity generation, higher than the 6.0% growth in December 2010. Data released by the Central Electricity Authority (CEA) indicates that the growth in electricity generation was led by a 10.5% growth in thermal electricity generation in December 2011 in year-on-year (y-o-y) terms, which benefitted to an extent from imports of coal. However, hydro electricity generation declined by 0.3% in December 2011 in y-o-y terms, dampening the pace of growth of electricity generation.

The manufacturing sector expanded by a sluggish 1.8% in December 2011, substantially slower than the 8.7% growth recorded in December 2010 and only mildly faster than the average growth of 1.2% in September-November 2011. The number of sub-sectors of the manufacturing sector displaying contraction rose to seven in December 2011 from five in November 2011, nevertheless remaining lower than in October 2011 (10).

Outlook
Electricity generation is expected to moderate in January 2012 relative to the 9.1% expansion in December 2011, given the adverse base effect, with a robust 10.5% growth in January 2011. Moreover, growth of consumer durables and non-durables is expected to ease in January 2012 given an adverse base effect. Provisional data released by GoI indicates that the volume of merchandise exports remained steady at around USD 25 billion in both December 2011 and January 2012, which may support industrial growth to an extent. The performance of capital goods may improve in January 2012, with an easing of the base effect, following a decline in growth to 5.3% in January 2011 from 20.2% in December 2010. The pace of de-growth of the mining & quarrying sector may ease to an extent in Q4FY12, following the sub-2% growth in January-March 2011. Nevertheless, with the continuing regulatory and environmental issues and bans imposed on mining in certain areas pursuant to judgements of the Supreme Court, mining output growth is likely to remain sluggish in the ongoing quarter.

The IIP recorded a healthy 7.5% expansion in January 2011. Overall, the industrial growth performance is unlikely to improve substantially in January 2012 as compared to the initial IIP growth estimate of 1.8% for December 2011.

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