ET View: September IIP – Lacklustre capital goods output keeps overall index low

Quick estimates for September show that the Index of Industrial Production (IIP) declined, or rather, rose minus 4.3%. But disaggregated data show that what has actually dipped the index is the steep drop in mining activity, and electricity output has gone into negative territory this time around due to the high base effect read a solid 8.2% increase in generation for the like period last year (or year-on-year).

As for manufactures, which account for over 77% weight in the industrial index, production has contracted and posted minus 3.9% growth. The sharp contraction in automobile production, with the output of motor vehicles, trailers and semi-trailers declining by minus 14.9 % y-o-y has clearly adversely affected production. But there are pockets of credible output, even in the large manufacturing segment. Notice that intermediate goods, which have a weight of over 17% in the index, have risen a credible 7% for September. Also, basic metal products, which have nearly 13% weight in the index, have gone up by 13.7%. It does suggest ample growth potential in the pipeline, with proactivity and follow-through policy action.

The industrial index also shows that consumption growth remains in the doldrums, for now. The production of consumer durables, which have almost 13% weight in the index, have declined minus 9.9%. It corroborates the fall in car output. As for non-durables, there appears to be relative improvement. The drop in output is a mere minus 0.4%. Note that non-durables add up to over 15% weight in the index, and the modest decline in production points to that producers expect strong demand in the segment sooner than later.

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Nevertheless, capital goods output remains lacklustre, what with production declining by as much as minus 20.7%. It is true that several items that make up the capital goods segment tend to be lumpy equipment which require gestation periods for completion, and it is possible that the latest figure may simply denote work-in-progress. But the fact remains that thoroughly lacklustre capital goods output point to poor investment demand, and the decline needs arresting to purposefully turnaround overall industrial output.

Besides, mining output, which has reduced minus 8.5% has pulled down the overall index number. We surely need sustained policy attention to rev up mining output; it makes no sense, for instance, to keep resorting to record coal imports even as our large domestic reserves stay quite unexplored. It would needlessly stymie industrial output simply due to policy rigidities and wonky logistics.


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