The new index of industrial production (IIP) may be more representative of the state of the Indian industry, but it is as volatile as the old data. Would you, for instance, say that the growth of consumer non-durables has slowed because growth in April 2011 was down to 2.1%, compared with 9.9% growth in March?
Well, growth in consumer non-durables, according to the new index, was 0.6% in December 2010. Nor is this due to the base effect. In April 2010, growth in consumer non-durables was 6.7%, while it was 0.2% in December 2009. So the poor December 2010 numbers were on a lower base. Or, if you wanted to argue the December numbers could be skewed due to the post-Diwali effect, why was growth in consumer non-durables as low as minus 0.9% in July 2010 on top of a modest 4.7% growth in July 2009?
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Or, let’s take capital goods. It’s up 14.5% year-on-year (y-o-y) in April 2011, on top of 35.5% growth in April 2010. But, in February 2011, this index decreased by 4.4% y-o-y on top of 39.4% growth in February 2010.
That’s not all. Growth in the capital goods index was a modest 4.7% and 7.2% in August and September 2010, on top of negative growth in the same months of the previous year. If the Reserve Bank of India was exasperated by the volatility in the old IIP data, it isn’t likely to be impressed by the new series.
In spite of the volatility, what are the trends? We could do a three-month moving average, but that, too, would be skewed because some of the high growth numbers are simply due to a low base.
For example, the 20% plus growth rates in capital goods seen in the last three months of 2010 are because growth in the corresponding months in 2009 was negative or very low. From that perspective, the growth in capital goods in March and April 2011 is very high, because it comes on top of very strong growth in March and April 2010.
Consumer non-durables, too, are doing fine compared with end-2010, although growth in April 2011 is lower than in March and February.
Clear signs of a slowdown, however, are evident in consumer durables, where growth was 3.8% in April 2011 on top of 23.3% growth in April 2010. Compare that with the growth of 18.3% in February 2011 on top of 28.9% growth in February 2010. To sum up, the data seems to show stronger growth in investment demand in March and April 2011, while consumption demand is slowing. Overall industrial growth is moderating, as seen from the fact that IIP growth was 6.3% in April 2011 on top of 13% in April 2010. IIP growth rates were higher in January, February and March 2011 on higher bases.
Nevertheless, as Gaurav Kapur, economist at Royal Bank of Scotland, says, it’s best to take the data on capital goods with a pinch of salt since order inflows for capital goods companies have been muted, and because higher interest rates are bound to take a toll on capital expenditure.
Photo by Prashanth Vishwanathan/Bloomberg; Graphics by Yogesh Kumar/Mint
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