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BW Businessworld

Double Is Nothing

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It should have been a pleasant surprise; the index of industrial production (IIP) for March not only beat estimates, but beat them by a huge margin. Compared to expectation of growth of 3.5 per cent year-on-year, the number came in at 7.3 per cent, almost double. But the response was mixed, and in some quarters, the seemingly high growth numbers were simply shrugged off.

The surprise was even greater when you consider that the base was quite high for March 2010; add to the slowdown in economic activity that prevailed over the past few months — and the low growth numbers for January and February 2011 — 3.5 per cent seemed a good number, even positive. So what changed?

Output in capital goods was the big factor. After having declined in January and February — growth was a negative 18 per cent in February on top of January's decline over December 2010 — sequential growth in capital goods in March was over 70 per cent.

In addition to year-on-year growth, analysts look at sequential growth (month-on-month, in other words) to ascertain if there are changes in underlying trends that go beyond seasonal changes. Part of the answer lay in commercial vehicles: output in February was 38,989 vehicles in February, which went up to 80,616 vehicles in March, a gigantic jump.

Analysts say that another part of the higher- than-expected growth came from restocking inventories as manufacturers sought to hedge against rising raw material prices in a volatile commodity market. The latest Dun & Bradstreet survey says the companies plan to hold higher inventory levels in the coming months than they had in the past 13 quarters; but as commodity prices correct and fall, that could hurt firms, so that approach could change.

But a slightly closer examination of the IIP data reveals other inconsistencies; sectorally, electricity output grew by 7.2 per cent, but coal production, which grows with electricity output since most power plants in India are coal- based, actually fell 1.2 per cent. For the flip side, consider use-based categorisation in the IIP; basic goods grew modestly by 5.4 per cent; manufacturing data shows that cement, steel and petroleum products grew well in March.

For the year as a whole (2010-11 or FY11) the IIP was up 7.8 per cent, compared to 10.5 per cent in FY10, and lower than the expected 9 per cent. Analysts are already pencilling in a moderate growth scenario for FY12. First, government expenditure growth in the budget is pegged at just 3.4 per cent, suggesting that the private sector will have to provide the rest.

Most firms are already rethinking expansion plans and capital investment, because interest rates are likely to remain high through most of the year. Second, volatility persists in raw material prices, making manufacturing firms a little more cautious about spending.

For those concerned about the volatility in the IIP numbers, there is some good news. Next month, the Central Statistical Organisation will introduce a new IIP monthly series with 2004-05 as the base year. Products such as typewriters and alarm clocks will no longer introduce unnecessary noise into the IIP data. Soon, it will begin to add up right; hopefully, the number of unpleasant surprises will decline to a minimum.

(This story was published in Businessworld Issue Dated 23-05-2011)