Celebrate the IIP, but with caution PDF Print E-mail
Tuesday, 16 January 2018 04:18
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Shobhana's edit


The sharp spike in the factory output number for November—up 8.4% y-o-y—is without doubt a very encouraging number, more so because it’s been driven up by a whopping rise in manufacturing, of 10.2% y-o-y, the best recorded performance since the start of the new series which uses 2012-13 as the base year. The data clearly stumped analysts—the growth was twice the consensus estimate—particularly because October had seen such a modest expansion of just 2% y-o-y. Moreover, the growth came off a reasonably good base; factory output in November 2016 had grown at 5.1% y-o-y. Economists have attributed the unexpected rise to a de-clogging in manufacturing activity following from the government’s initiatives to simplify and ease refunds to exporters, which also resulted in a surge in exports. This seems plausible since virtually every segment has reported a better performance—from metals, pharmaceuticals, basic consumer staples, durables, electronics and electricity. Also, having adjusted to the GST, manufacturers appear to have built up inventories—which were run down post the festival sales—ahead of the wedding season.

The best piece of news was the big jump in the production of good capital goods, up 9.4% y-o-y—on the back of a not insubstantial base. This could be reflecting the good investment trends, in sectors such as roads, renewable energy and railways; overall, the trend in investments has been very subdued, as data from CMIE shows. Nevertheless, managements at engineering firms such as Larsen &Toubro have observed there is some improvement in the ordering environment, and as such, capex data could continue to be encouraging in the next few months, helped along by a favourable base.

In sum, while the November numbers are, no doubt, strong, they could moderate since 2017 was a most unusual year with several one-time events. The rollout of the GST, for instance, forced manufacturers to alter production cycles. Besides, the government’s move to make BS IV emission standards mandatory left most two-wheeler manufacturers, except Bajaj Auto—with a fair amount of inventory of BS III compliant vehicles which were offloaded at huge discounts in March. Similarly, the mandatory alteration to commercial vehicles (CVs) pushed up sales in November and December.

Moreover, the economy was grappling with the lagged effects of demonetisation and the shortage of cash. The festival season set in very early as well. However, it would have to be said that demand seems to be picking up, as is suggested by the swing in consumer durables—from a contraction to an acceleration. The uptick in volumes of CVs, a proxy for the economy, is also in sync with this trend. Rising consumption is heartening at a time when few jobs are being created. However, consumers appear to be shying away from big-ticket purchases such as homes as seen from the much slower increase in disbursements of home loans by banks. Also, in Q2FY18, private final consumption expenditure slowed to 6.5%, the slowest in at least five quarters, while government consumption saw a marked slowdown to 4.1% y-o-y. It would, therefore, be too early to thump the table to say the production data will continue to be robust, especially since companies are bound to increase prices to pass on the higher cost of fuel and other raw materials. For now, one is more inclined to read the numbers as a blip, albeit a big one.


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