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IIP: Revival ahead? - Views on News from Equitymaster
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  • Dec 13, 2000

    IIP: Revival ahead?

    The headline growth in the Index of Industrial Production (IIP) touched 6.6% in October 2000. The growth recorded is the highest during the current fiscal year (but much lower when compared to October 1999). The rise in IIP growth, driven by the electricity and mining groups, comes on the back of a rise in industrial activity in September.

    Even as the headline IIP growth has shown an improvement, there are several reasons why the skepticism will persist. First, the manufacturing sector posted moderate growth of 5.6%, which, though comparable with earlier months this year, is much lower than the corresponding period last year (9.4%). Second, investment activity remains sluggish indicating that business confidence in a revival is low. As a result, both consumption and investment activity remain subdued. Third, a part of the increase in IIP growth can be attributed to the year on year effect in case of the mining group. The group had actually posted a decline of 1.9% in October 1999. A lower base has enabled the mining group to post a growth of 10.3%.

    Indian industry has been faced with several challenges so far this year. First ofcourse was the sharp rise in crude oil prices. This impacted demand and limited the ability of companies to pass on the hike in costs to consumers. Consequently, companies were faced with an environment of slowing demand and declining profitability. Then came the drought in several western states followed by floods in the East. All these factors took a toll on demand and this is clearly evident from the sharp decline in IIP growth.

    Nevertheless, the rise in IIP growth over two successive months (September and October) is something that cannot be totally ignored. For one, the rise comes after a sustained decline in IIP growth, from a high of 12.6% in February to a fraction below 5% in July and August. Another factor that could be pushing growth is the surge in exports, which have been growing at brisk rates of over 20%. However, the growth in IIP will gain credibility only when the trend were to sustain in the coming months.

    Letís look at several factors that will determine the course of the industry in the coming year. First will be whether or not the excellent performance on the exports front is sustained. Second, one needs to keep an eye on crude prices. Any surge could snip a possible recovery while a decline could boost demand and profitability. Third, and one of the most important factors, will be the performance on the agriculture front. It would be correct to say that if agricultural production booms, industry will respond. On the other hand we may face a situation similar to this year when demand turned sluggish. Finally, the threat of cheap imports will continue to pose a challenge for the domestic industry, especially after quantitative restrictions are completely withdrawn early next year.

    Surely, growth or no growth, Indian industry is poised for interesting times in the coming year.



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