If industry is contracting, shouldn’t manufactured goods prices be falling more sharply?
The key questions that the January industrial production data were supposed to answer were: has there been some improvement in economic activity from the severe disruption seen during the last quarter of 2008? Was the last quarter particularly bad because of the credit crunch and can things be expected to get better from here on?
Well, there’s hardly a difference between the 0.5% year-on-year contraction in January from the revised data which show industry shrank by 0.6% in December, rather than the 2% decline earlier envisaged. Though, of course, January’s data could very well be revised upwards too. There does seem to be some revival in industrial momentum during the month, if we go by the Goldman Sachs seasonally adjusted monthly momentum number, which rose by 0.8% for January against a decline of 0.3% in December. But destocking of the high inventories piled up at the end of the last quarter must have curtailed production in January.
There are some encouraging signs, in particular the 2.5% bounce in consumer durables in January after declines of 4.2% and 4.1% in November and December, respectively. But then, that’s offset by the decline in the growth rate of consumer non-durables.
Also negative is the fact that the contraction is spreading across sectors. Of the 17 broad industry groups that make up the Index of Industrial Production (IIP), only five showed growth in January. These were beverages and tobacco; chemical products; rubber, plastic, petroleum and coal products; machinery and equipment other than transport equipment; and “others”. In December, as many as seven out of the 17 industry groups had shown growth while in November, 10 groups had shown growth. The highlight of IIP data was the huge rise of 15.4% in capital goods, also reflected in the growth of 17.5% in the group “machinery and equipment other than transport equipment”. This seems to be purely a base effect. As Goldman Sachs’ Tushar Poddar and Pranjul Bhandari point out, “Monthly momentum in capital goods, however, fell 0.5% m-o-m (month-on-month) versus a 1.7% m-o-m rise in December”.
But the inflation data is rather interesting. While the Wholesale Price Index (WPI) all-commodity index has now fallen by 5.8% from its peak on 13 September, the fall in the manufactured goods price index has been 4.4% from its highs. Moreover, there are quite a few manufactured products where the fall in prices has been much lower. These include wood and wood products, paper and paper products, leather products, rubber and plastic products, fertilizer and pesticides, paints and varnishes, non-metallic mineral products, metal products, transport equipment and parts, and cement—in each of these product groups WPI’s fall from its high has been less than 2%. Machinery and machine tool prices have come off 3.4% from their highs, according to WPI. It’s only in basic metals and allows (down 16.7%) and in textiles that there has been a substantial fall in price.
The question is: if production is contracting, why haven’t prices fallen further? Contrast China, where the producer price index was down 4.5% year-on-year in February, in spite of industrial production rising 3.8% in January-February.
Either the WPI data is wrong or the IIP numbers are suspect or a sharp fall in the manufactured goods price index in India can be expected in future.