IIP numbers continue to surprise

Index of Industrial Production continues to surprise all the analysts. The growth in the April month was noted at 13.6% way ahead of analysts’ estimate of 11.3% !!

So much so, all the the newspaper have expressed surprise: ET, ET Edit, BS, BS edit, FE, FE Edit etc.

Here are my comments. First a bit about IIP basics: 

1. IIP is an index and is basically a constituent of 3 broad sectors- manufacturing(Mfg) , mining(Min) and Electricity(elec). What comes in these sectors are various things industries manufacture. The weights of the three in the index are:

  • Mfg- 793.58 ( items included are like food items, machinery, wood furniture etc)
  • Elec- 101.69 (Generation and transmission of electricity in various forms- thermal, hydro solar etc, so if you see growth here means more electricity is being produced and transmitted)
  • Min- 104.73 (Mining of coal, oil other metals etc)
  • Total – 1000 

Therefore, Mfg is the most important sector. The Mfg sector is further divided into 17 industry groups:

  1. Food Products

  2. Beverages,Tobacco and related Products

  3. Cotton Textiles

  4. Wool, silk and man made fibre textiles

  5. Jute and other vegetable fibre textiles

  6. Textile products including wearing apparel

  7. Wood and wood products (furniture & fixtures)

  8. Paper, paper products, printing and allied industries

  9. Leather and leather and fur products

  10. Basic Chemicals & Chemical Products (except products of Petroleum & Coal)

  11. Rubber, Plastic, Petroleum and Coal Products

  12. Non-Metallic Mineral Products

  13. Basic Metal and Alloy Industries

  14. Metal Products and Parts, except Machinery and Equipment

  15. Machinery and Equipment other than Transport equipment

  16. Transport Equipment and Parts

  17. Other Manufacturing Industries

 So you have various indsutries which manufacture various goods and are reported in IIP. So to track sectors, this is the most useful and reliable classification.

3. Another important classification is use-based. In which IIP is classified on the base of use i.e. whether it is a capital good, a consumption good etc. So all the above 3 sectors items are reclassified on the basis of usage and we have 4 classifications:

1. Basic Goods: Like cement, coke, diesel etc. Hence, all goods under Mining and Elec sector are nothing but basic goods.
2. Capital Goods: Boilers, Cranes, Power transformers etc.
3. Intermediate Goods: auto anciallry, Plywood, Bolts and nuts, cotton yarn etc.
4. Consumer Goods- further divided into 2 sub-sectors:
         i) Consumer durables: 2 wheelers, washing machines, fans etc.
        ii) Consumer non-durables: Tea, coffee, milk-powder etc.

Now for some facts (I am only covering annual growth as it is a better way of undersatnding things) :

  • In 2006-07 the trend so far has been that two sectors namely intermediate goods and consumer non-durables sector have shown a huge jump from the growth seen in 2005-06 (Intermed goods in 05-06 – just 2.6% and in 2006-07 – 11.9%, Non-durables igrowth increased from 7.1% to 14.7%)  . So companies making auto parts, cholcolates, biscuits etc have higher production numbers this year. The growth in non-durables is consistent with the consumption led growth theory which I had mentioned about previously.
  • Sectors like Capital goods continue their impressive performance and this year it grew by 18.3% compared to 16.1% in 2005-06. Infact since 2001-02 every year growth rates have been higher than previous year’s in this sector. High capital goods indicates that industries are going for capital expansion as well.
  • Electricity has been around 5% since 2003-04 and this year has been 7.2%. A simple way of looking at this is we need electricity in almost everything we make. With many sectors growing at double digits, electricity should atleast meaure up to the growth, but it is way-off. Hence, so many power cuts. 
  • Within mfg sector, the growth has been impressive in Wood Products (from negative 6% in 2005-06 to 29.1% in 2006-07) (which is classified as intermediate good), cotton textiles (yarn is intermediate good and cloth is non-durable good) and rubber and plastic goods (which has bit of every type of good).

The future outlook….I really don’t know. pretty difficult as barring Feb 2007 IIP has beat market expectations by a huge margin.

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