Insight into Index of Industrial Production - Karvy Stock Broking Limited

The August 2010 Index of Industrial production (IIP) disappointed the street as at 5.6% yoy it was below the 9.65% forecast in the Reuters poll of analysts. The interpretation of these numbers was that either it was an aberration and that growth would pick-up in September or that we are in a weakening environment of industrial growth. The August growth rate is the lowest in the last 15 months.

Capital goods declined 2.6% in August and on a three months average it's the worst growth (up 21.4%) performance since December last year. Similarly, non-durable consumer goods declined 1.2% in August against expansion of 6.1% a year ago and on three months moving average growth is muted at 0.6%. Capital goods is more cyclical that the other components of the IIP and also because of its size can be lumpy and therefore would be more volatile but the sharp yoy volatility in the months of June (-0.3%), July (+72%) and August (-2.6%) raises concerns of the credibility of the data.

The 3 months moving average data reveals that there is a slowdown in the IIP since February 2010 where it peaked at 16.3% and thereafter has steadily decelerated to 8.8% in August. The deceleration is also visible in the basic goods (from March 2010), capital goods (from April 2010 but with a pick-up in July) and intermediate goods (from January 2010) while durables appear to be showing signs of weakness from January 2010 with some slight revival in August 2010.

The discernible deceleration in the 3 months moving average of the IIP could be attributed to the withdrawal of the government's stimulus package and the corresponding weak private consumption, the high inflation rates and the higher interest rates. The weak global demand and the strengthening rupee could also have adversely impacted the anemic growth in the non durable goods index through lower exports and cheaper imports, impacting production and employment. As capital inflows increased in September resulting in the rupee becoming stronger, the production data linked to exports and imports for September may deteriorate further. Alternatively, goods associated with the surge in the stock market like consumer durables may be positively impacted in September but the trend in the IIP since February 2010 appears to indicate a deceleration.

Source : Equity Bulls

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