|That sinking IIP feeling|
|Thursday, 13 October 2016 00:00|
Capital goods distort it but even consumer goods slow
What is worrying about the slowdown in industry is not only that it is becoming more pronounced in some sectors, it also seems to be more widespread. Factory output, as measured by the IIP, declined for the second consecutive month in August, by 0.7%, on the back of a 2.5% fall in July, taking the average for the fiscal so far to a negative 0.3%. That’s very disappointing given the comparable growth for the corresponding period in 2015 wasn’t very high either at 4.1%. It is true the data can house some distortions; for instance, a big contraction in a segment like insulated cables, which has a miniscule weight of just 0.12%, pulled down overall IIP by as much as 300 basis points in August. But, there’s no taking away from the fact large parts of industry remain inherently sluggish, even if you account for the distortion caused by one-off data points like insulated cables. The capital goods segment, for instance, continues to perform poorly falling for the tenth straight month in August—while you can argue over the extent of the fall, the direction is corroborated by the weak order flows at engineering firms and the negative output gap.
This time around, the weak capital goods data has been accompanied by a fairly sharp moderation in the pace of growth of consumer durables which grew at just 2.3%, down from 5.9% in July and 7.8% in Q1FY17. This is disconcerting given consumption is expected to drive the economy till the capex cycle turns. However, sales of tractors were strong in September thanks to a good monsoon. Moreover, car makers have been able to push wholesale sales by 20% y-o-y, of which a good part should translate into retail sales in the festive season. Indeed a record farm output should see farm incomes rise and this, together with the pay hikes for government employees, should give consumption a fillip. For makers of consumer staples, however, there has been little to cheer with the segment reporting anaemic growth so far this fiscal averaging sub 1%.
Though a new IIP, out in December, with a base of 2011-12 as compared to the 2004-05 right now, will probably show a higher growth since it will capture new industries, it is useful to keep in mind even the current IIP trends broadly correlate with the sluggishness in corporate profits over the last couple of years. India Inc is expected to report another ordinary set of results for the three months to September. Kotak Institutional Equities (KIE) estimates that for the universe of stocks that it tracks—excluding energy companies—net profits will rise just 1.5% y-o-y in Q2FY17. For the Sensex set of stocks, too, the increase in profits is estimated at only 4%, on the back of a 2.4% fall in the September 2015 quarter, while the June quarter had seen a fall of 1.5%. Even as purchasing power in the domestic market remains limited globally too, demand has been muted which is why exports have now contracted 20 months in a row save in June. In the absence of meaningful investment by the private sector it is up to the government to spend on projects to boost output.