ICRA Comment

Index of Industrial Production August 2010: Continued

Volatility in Growth Rates

The Index of Industrial Production (IIP) expanded at a lower-than-

Contact:
expected rate of 5.6% in August 2010 in year-on-year (y-o-y) terms.
Aditi Nayar Notably, growth for July 2010 has been revised upwards to 15.2% from
aditin@icraindia.com 13.8%, which is in sharp contrast to the mild growth of 5.8% in June
+91-124-4545385 2010 and 5.6% in August 2010. The uneven pattern of growth is largely
attributable to the underlying volatility in the growth of capital goods and
machinery and equipment (aside from transport equipment), which is
likely to reflect bunching in completion of orders. In ICRA’s view,
although the volatility displayed by the IIP growth in the past three
months is disconcerting, the fundamentals of the Indian economy remain
healthy, with the average IIP growth over the three-month period from
June to August of 2010 at 8.8%.

The IIP growth of 5.6% in August 2010 was led by a 7% growth of the
mining & quarrying sector and a 5.9% growth of the manufacturing
sector, while the electricity sector displayed a marginal growth of 1%.
The pace of growth of all the three sectors within the IIP index
decelerated in August 2010 relative to July 2010. The deceleration was
the sharpest in the case of the manufacturing sector, which carries a

October 2010
weight of nearly 80% in the IIP index; growth slumped to 5.9% in August
2010 from a revised growth of 16.7% in July 2010, reflecting the volatility
in the growth of the machinery & equipment (other than transport
equipment) sub-sector.

In terms of the use-based classification, the IIP growth of 5.6% in August

2010 was dampened by a contraction of 2.6% and 1.2%, respectively, in
capital goods and consumer non-durables and a low growth of 3.7% in
basic goods, whereas consumer durables and intermediate goods
displayed robust growth of 26.5% and 10%, respectively.

Capital goods contracted by 2.6% in August 2010 in y-o-y terms, relative

to the revised growth of 72% in July 2010 and a marginal contraction of
0.3% in June 2010. This volatility in the pace of growth of capital goods
suggests lumpiness in completion of orders, with a considerable extent
of bunching in July 2010.

Consumer non-durables contracted by 1.2% in August 2010. This

category has displayed listless growth since May 2010, which is likely to
reflect the impact of continuing high inflation on disposable income and
demand for non-durable products. In contrast, consumer durables
expanded by a robust 26.5% in August 2010, belying the base effect;
consumer durables had expanded by nearly 25% in August 2009. It is
likely that the robust growth in the production of consumer durables in
August 2010 is partly related to the building up of inventory prior to the
upcoming festival season in India.

Intermediate as well as basic goods registered lower growth in August

2010 than August 2009. Basic goods displayed a low growth of 3.7% in
August 2010 as compared to 7.7% in August 2009. The growth rate of
intermediate goods in August 2010 remained healthy at 10%, albeit
lower than the 14.4% growth registered in August 2009.
ICRA Comment Index of Industrial Production: August 2010

Table 1: Trend in IIP Growth

Weight July August July August April-August
2009 2009 2010 2010 2009 2010
IIP 100.0% 7.2% 10.6% 15.2% 5.6% 5.9% 10.6%
Sectoral
Mining 10.5% 8.7% 11.0% 9.9% 7.0% 8.2% 9.5%
Manufacturing 79.4% 7.4% 10.6% 16.7% 5.9% 5.6% 11.4%
Electricity 10.2% 4.2% 10.6% 3.7% 1.0% 6.5% 4.3%
Use-Based Classification
Basic 35.6% 4.7% 7.7% 5.2% 3.7% 6.3% 5.9%
Capital 9.3% 1.7% 9.2% 72.0% -2.6% 3.0% 31.6%
Intermediate 26.5% 9.8% 14.4% 9.2% 10.0% 9.3% 9.9%
Durables 5.4% 22.1% 24.7% 23.7% 26.5% 18.7% 27.2%
Non-Durables 23.3% 5.3% 6.1% 1.4% -1.2% -0.8% 1.6%
Source: Central Statistical Organisation (CSO)

Source: CSO

Sectoral Growth
The manufacturing sector expanded by 5.9% in August 2010, a considerably lower rate than the robust
growth of 10.6% recorded in August 2009.

The 5.9% growth of the manufacturing sector in August 2010 is similar to the 5.8% growth in June 2010 but
is in sharp contrast to the revised growth of 16.7% for July 2010. This pattern of growth is related to the
underlying volatility in the machinery & equipment (other than transport equipment) subsector, with a
weight of nearly 10% in the IIP index, which expanded by 1.5%, 56.8% and 0.4%, respectively, in June,
July and August of 2010. The unevenness in the growth pattern of the machinery & equipment sub-sector
is disconcerting. However, it is likely that the spike in the growth of the manufacturing sector in July 2010
was on account of a clustering in completion of equipment orders; and that the low growth in June 2010
and August 2010 may not be symptomatic of a substantial loss of growth momentum. Excluding the
contribution of the machinery & equipment (other than transport equipment) sub-sector, the growth of other
manufacturing sub-sectors presents a considerably less volatile trend, with expansion of 5.5%, 6.7% and
5.8%, respectively, in June, July and August of 2010.

The five sub-sectors listed in Table 2, namely, transport equipment & parts; other manufacturing industries;
rubber, plastic, petroleum & coal products; food products and basic metal & alloy industries, contributed to
4.9% of the 5.9% growth in the manufacturing sector in August 2010. These five sub-sectors, which
account for around 29% of the IIP index, had accounted for 5.3% of the 16.7% growth in the manufacturing
sector in July 2010.

The uptrend in the transport equipment & parts sub-sector continued in August 2010. This sub-sector
expanded at a robust rate of growth of 22.8%, although slightly lower than the 25% growth experienced in
July 2010. The growth is in line with the high growth in the production of passenger and commercial
vehicles, as indicated by the data released by the Society of Indian Automobile Manufacturers (SIAM).
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ICRA Comment Index of Industrial Production: August 2010

The other manufacturing industries sub-sector expanded by a sharp 27.9% in August 2010 as compared to
a healthy growth rate of 9.5% in August 2009. This sub-sector has displayed healthy growth since April
2010; average growth so far in the fiscal year is robust at 28%.

The rubber, plastic, petroleum & coal products sub-sector expanded at a healthy rate of 12.2% in August
2010. Although this marks a deceleration relative to the 20% growth in July 2010, it is related to an
unfavourable base effect, as the sub-sector had expanded by 20.4% in August 2009. The rate of growth of
the basic metals & alloy industries sub-sector improved somewhat to 6.4% in August 2010 from 4.7% in
July 2010.

The food products sub-sector, with a weight of over 9% in the IIP index, displayed a healthy 16.8% growth
in August 2010, considerably higher than the growth recorded since May 2010. However, this is led by a
favourable base effect, with the food products sub-sector having contracted by 6% in August 2009.

Table 2: Contribution to the Growth of the Manufacturing Sector by Sub-sectors

Sub-sector Weight Growth Contribution to
Aug 2009 Aug 2010 Manuf. Growth
Transport Equipment & Parts 3.98 15.0% 22.8% 1.7%
Other Manufacturing Industries 2.56 9.5% 27.9% 1.0%
Rubber, Plastic, Petroleum & Coal Products 5.73 20.4% 12.2% 0.8%
Food Products 9.08 -6.0% 16.8% 0.8%
Basic Metal & Alloy Industries 7.45 2.1% 6.4% 0.7%
Others 50.56 12.1% 1.5% 1.0%
Manufacturing Sector 79.36 10.6% 5.9% 5.9%
Source: CSO

The three sub-sectors, namely, basic chemicals &

chemical products; wood & wood products, furniture &
fixtures; and textile products, with a combined weight
of nearly 20% in the IIP index, displayed contraction in
August 2010. Basic chemicals & chemical products,
with a weight of 14% in the IIP index, contracted by
2% in August 2010 as compared to a healthy growth of
14.8% in August 2009. The pace of growth of this
category has decelerated since April 2010, reflecting
the base effect, with an uptrend over the same months
in the previous fiscal year. Wood & wood products,
furniture & fixtures with a weight of 2.7% in the IIP
index has displayed a trend of contraction since April
2010; and the pace of contraction worsened to 15.3%
in August 2010 from 9.4% in July 2010. Textile
products, with a weight of 2.54% in the IIP index,
contracted by 3% in August 2010 and 0.7% in July
2010, although the various categories of textiles
expanded in both of these months. Source: CSO

IIP growth was supported by the 7% growth of the mining & quarrying sub-index in August 2010. As
anticipated, the pace of growth slowed down from 9.9% in July 2010 on account of heavy rainfall over large
parts of India. The growth of this sub-index is expected to remain moderate in September 2010.

Electricity generation expanded by a marginal 1% in August 2010 as compared to a healthy 10.6% in

August 2009. According to the Central Electricity Authority (CEA), thermal generation displayed a low
growth of 1.3% while hydroelectricity generation displayed a contraction of 1.1% in August 2010. With
considerable rainfall and replenishment of reservoirs, hydroelectricity generation is expected to improve in
the forthcoming months.

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ICRA Comment Index of Industrial Production: August 2010

Use-based Classification
In terms of the use-based classification, IIP growth of 5.6% in August 2010 was led by the healthy growth
of 26.5% and 10%, respectively, in consumer durables and intermediate goods, while the contraction of
2.6% and 1.2% displayed by capital goods and consumer non-durables, respectively, dampened the pace
of IIP growth. The pace of growth of basic goods was low at 3.7% in August 2010, a decline relative to the
5.2% growth registered in July 2010.

The growth of capital goods has experienced considerable volatility since June 2010; after displaying a
marginal 0.3% contraction in June 2010, capital goods expanded by 72% in July 2010 and subsequently
contracted by 2.6% August 2010. This is similar to the trend displayed by the manufacturing sub-sector of
machinery & equipment (other than transport equipment), a large proportion of which falls under the capital
goods category. In month-on-month (m-o-m) terms, the capital goods sub-index contracted by 3% in June
and expanded by 50% in July 2010 before contracting by 40% in August 2010. This trend is contrary to the
monthly growth pattern in recent years, and supports the view that granularity in completion of orders has
given rise to the volatility in the pace of growth of capital goods. Additionally, the deceleration in growth in
August 2010 reflects, to a limited extent, an unfavourable base effect; in y-o-y terms, the growth of capital
goods had improved to 9.2% in August 2009 from 1.7% in July 2009.

Consumer non-durables contracted by 1.2% in August 2010. This category has displayed an average
growth of 1.6% since April 2010, which is attributable to weak demand for non-durables on account of the
elevated inflation levels. As the First Advance Estimates released by the Government of India indicate a
healthy kharif output, ICRA expects food prices to cool somewhat in the forthcoming months. The
associated positive impact on disposable incomes is expected to lead to a healthier rate of growth of
consumer non-durables in the forthcoming months.

Consumer durables expanded at a robust growth rate of 26.5% in August 2010 as compared to 23.7% in
July 2010. The growth performance is remarkable, considering that the base effect has not been
favourable; consumer durables had displayed growth in excess of 20% in July as well as August of 2009.
These trends suggest that the healthy expansion in the production of consumer durables registered in
August 2010 may be related to the building up of inventory prior to the forthcoming festival season in India.

The pace of growth of intermediate goods strengthened to 10% in August 2010, relative to 9.2% in July
2010. This is particularly notable, given the base effect; intermediate goods had expanded by 14.4% in
August 2009.

Outlook
Robust growth in commercial vehicle production, as indicated by the data released by the Society of Indian
Automobile Manufacturers (SIAM), suggests that underlying economic activity remains healthy, while
sustained growth in passenger vehicles highlights that consumer demand continues to be strong. Mining
growth is likely to have remained at levels similar to August 2010, following continued copious rainfall in
September 2010. Growth in electricity generation is expected to have remained low in September 2010,
following a healthy 7.5% growth in September 2009. Given the base effect, with a robust 9.3% growth in
September 2009, the IIP index is expected to display growth of around 7% to 8% in September 2010.

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ICRA Comment Index of Industrial Production: August 2010

Annexure

Source: CSO

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ICRA Comment Index of Industrial Production: August 2010

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