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Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

The message in IIP numbers

For the real picture of industrial activity, one will have to look at the numbers over the longer term

The November Index of Industrial Production (IIP) number was a big disappointment; but is wallowing in misery over a 3.2% industrial contraction overdoing it? Is it as silly as euphoria over the 9.9% growth in October? Because of the Diwali effect, it’s best to average the two growth numbers, which gives us 3.4% year-on-year growth for October-November 2015. That’s quite a bit lower than the 3.9% year-on-year average growth for April-November, which suggests a distinct slowdown in the industrial sector.

But for the real picture of industrial activity, look at the numbers over the longer term. Take consumption, which everybody agrees is holding up rather well. The consumer goods index, a part of the IIP, was at 167.2 in November 2015, but that could be post-Diwali depression, so let’s take the much higher October number, when it was at 176.4 and had gone up an eye-popping 18.4% year-on-year. Well, the fact of the matter is that the Consumer Goods index was at a much higher 191.7 as far back as October 2012. So, in October 2015, it was actually lower by 8% compared to where it was three years ago. Either that, or there’s something wrong with the IIP numbers, which isn’t all that unlikely.

Consider the Consumer Durables index, which has been growing by leaps and bounds. It slipped in November 2015, doubtless again because of post-Diwali blues, but it was at 272.9 in October, up a hard-to-believe 42.3%. But then, to put matters in perspective, this index was at 289.2 way back in October 2010, which means consumer durables production has shrunk by 5.6% in the last five years. That’s not all—the Consumer Durables index was at 336.2 in October 2012.

Unlike consumption, nobody believes the capital goods segment is seeing much of a revival. The Capital Goods index, part of the IIP, was at 287.7, 278.3 and 190.7 in September, October and November 2015, respectively. Well, this index was at 306.8 in September 2010. That’s a contraction of 6.2% in the last five years.

What the current level of the consumer durables and capital goods indices indicate is the huge level of overcapacity in these sectors. If production was higher five years ago and capacity has been added in the last five years, it’s a clear indicator of massive overcapacity at present.

There are several reasons for the fall, of course. One is the drying up of external demand, with the world economy and trade slowing down. Another could be rural distress in the last couple of years. But Gaurav Kapur, senior economist at RBS, points to a bigger threat in the current environment of global overcapacity and tepid growth—the threat from industrial imports, with dumping by countries like China. It’s very probable that, at least in part, the overcapacity seen from the IIP numbers is a reflection of global industrial excess capacity.

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