January 2012

CRISIL Economy First Cut

IIP: Surprise rebound in industrial production
Overview: Industrial growth rebounded to 5.9 per cent in November 2011 as compared to a contraction of 4.7 per cent (revised) in the previous month. This fiscal so far, industrial output has followed a volatile growth trajectory, with the average growth for the first eight months (April-November) standing at 3.8 per cent as compared to 8.4 per cent in the same period last year. The pick-up in growth during November 2011 was mainly on account of a strong performance by electricity and manufacturing sector. Despite the surprise performance of IIP in November 2011, we believe that the IIP growth during the remaining months of this fiscal, though positive, would remain below 5 per cent.
Electricity sector supported by manufacturing (which constitutes 76 per cent of the overall industrial production) led to the pick-up in industrial production in November 2011. While electricity output increased by 14.6 per cent, manufacturing output rose by 6.6 per cent in November 2011. At the 2-digit classification, out of 22 manufacturing groups 17 showed positive growth in November 2011. Mining sector production meanwhile continued to contract for the fourth consecutive month in November 2011. It has remained weak in this fiscal so far, with an average growth of -2.5 per cent for the first 8 months as compared to 7.0 per cent in the same period last year. Ban on iron ore mining and falling gas production at the KG basin are some of the reasons which have weighed on the mining sector growth this year. Reflecting the underlying weakness in the investment scenario in the country, capital goods growth remained in the negative territory in November 2011 . IIP growth excluding the volatile capital goods component stands at an even better 7.8 per cent for November 2011. Another major surprise came from the consumer goods growth, as it posted an impressive double-digit growth of 13.1 per cent in November 2011 as compared to a subdued 0.2 per cent growth in the previous month. This robust growth is particularly unexpected because it comes in an economic environment of high inflation and rising interest rate. However, we believe that this could be a blip as bulk of the jump in consumer goods growth could be attributed to a low base of 0.7 per cent in November 2010. Basic and intermediate goods production continued to remain muted in November 2011. It doesnt bode well for the overall IIP growth going ahead; as if final demand changes, then the production of basic/intermediate goods will tend to be adjust first.
April-November Weight General Manufacturing Mining Electricity Basic Capital Intermediates Consumer Goods -Durables -Non durables
Source: CSO

Nov-10 6.4 6.5 6.9 4.6 5.7 25.7 4.3 0.7 7.2 -4.4

Sept-11 1.9 2.4 -7.1 9.0 4.0 -6.5 1.3 4.3 9.2 -0.2

Oct-11 -4.7 -5.7 -6.1 5.6 -0.1 -26.5 -7.8 0.2 -0.2 0.7

Nov-11 5.9 6.6 -4.4 14.6 -0.1 -4.6 0.2 13.1 11.2 14.8

FY11 8.4 9.0 7.0 4.5 5.5 18.2 8.1 8.0 14.6 2.8

FY12 3.8 4.1 -2.5 9.5 6.2 -1.0 -0.3 4.9 5.3 4.6

1000.00 755.27 141.57 103.16 355.65 92.57 265.14 286.64 53.65 232.99

CRISIL Economy First Cut - IIP

Core sector growth picks up in November

y-o-y% 20 15 10 5 0 -5 -10 Jul-09 Jul-10 Nov-08 Mar-09 Nov-09 Mar-10 Nov-10 Mar-11 Jul-11 Nov-11

Consumer goods growth bounces back sharply

y-o-y% 80 60 40 20 0 -20 -40 Jul-09 Jul-10 Nov-08 Nov-09 Nov-10 Jul-11 Nov-11 Mar-09 Mar-10 Mar-11

IIP-General

Core Industries

Capital Goods

Consumer goods

Core sector output rebounded in November 2011 with a 6.8 per cent growth compared to an anaemic 0.1 per cent growth in October 2011. Reflecting this rebound and given the fact that core index has a weight of 38 per cent in total IIP, industrial output grew at 5.9 per cent in November 2011.
5 per cent in August 2011, mainly due to poor performance and contraction in output of coal, natural gas and fertilizer. The core sector has a weight of 38 per cent in total IIP.

Consumer goods growth bounced back sharply November 2011 mainly due to a low base of last year.

in

Amongst consumer goods, growth in both durables and non-durables picked up swiftly during the reporting month.

Forward-looking Indicators
y-o-y % 180

%
30

Cement dispatches (y-o-y)

m-o-m SA series

Commercial Vehicles sales

140 10 100 60 -10 20 -20 -30 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 -60 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11

Source: Cement Manufacturers Association & CRISIL Research

Source: Society for Indian Manufacturers Association (SIAM)

Growth in cement dispatches serves as an important indicator of manufacturing sector activities. It has been sluggish in this fiscal so far, except for a one-off spike in November 2011. In December 2011, growth in cement dispatches moderated again, with the slowdown manifested in the month-on-month seasonally-adjusted series too. Commercial vehicles (CV) sales also serve as an important lead indicator for industrial activity. Companies seeing change in demand for their products will quickly adjust their requirement of CVs, assuming, of course, that their goods are physically transported. CV sales growth softened sharply to 16.4 per cent in December 2011 from 34.8 per cent growth in the previous month.

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