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Industrial output is up 11.3%, but keep your fingers crossed

When you are expecting bad news, any lack of it is cause for celebration. This is the case with the latest Index for Industrial Production (IIP) for March, 2011, which rose by a healthy 7.3% over the corresponding period of the previous year.

So is all rosy now on the industry front?
We think not. For one, the latest numbers appear good right now in large part because of the serious downward revision of expectations following four months of sub-four percent growth. A look at the monthly growth figures over 2010-11 reveals that IIP has seen better days, growing in double digits during April, May, July and October.

If growth had remained robust, the March figure would actually have looked like a disappointment instead. This is also seen from a comparison with the 2010-11 figures, which have risen by a higher 7.8% at five percentage points higher than the March growth rate.

Second, the 2010-11 IIP growth figures of 7.8% are much lower than the 2009-10 figures of 14.8% over the previous year on a broad-based softening in mining, manufacturing and electricity. It can be argued that the 2009-10 growth was on a low base (IIP grew by 2.8% in 2008-09). However, our estimates suggest that even with a higher base, 2010-11 figures look relatively weak by comparison.

Third, growth in capital goods, which represents investment activity in the economy, and intermediate goods, which is a lead indicator for economic activity, have both softened in March and in 2010-11. While capital goods growth fell to 9.3% in 2010-11 from 20.9% in 2009-10, intermediate goods growth fell more modestly to 8.8% from 13.6 during the previous year.

But are there any silver linings?
There are. It cannot be overlooked that the March IIP numbers are over an exceptionally strong growth of over 22% in 2009-10. This factor has been seen as a reason in the past months for slow growth, but March has seen a break away from that mold.

Also, consumer goods performance has picked up in 2010-11, suggesting a more positive spending environment in the economy. During 2010-11, growth rose to 7.5% from 6.2% in2009-10 due to acceleration in production of both durables and non-durables.

The verdict: While all is not hunky dory on the industrial production front, the March numbers give us some reason for cautious optimism. Much will depend on how growth pans out over the coming months, since this months numbers are the first signs of industrial recovery.

While there has been an irrefutable pick up in March IIP numbers from the previous months, this is the first sign of a turnaround after a few months, suggesting that we should watch for a build-up in trends over the coming months. While below annual average performance and softening in capital and intermediate growth are still causes of concern, consumer goods growth brings optimism.

A caveat, though: March is often a difficult month to judge results by, since all organizations try and speed things up for the year-end. April is the month to watch. Also May, for thats when interest rates were raised in a big way.

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