Slowdown in investment activity and household consumption: worrying trends in IIP data

What do the granular data on industrial production show?

In the first quarter (April-June) of this year, the index of industrial production grew by 13 per cent. Over the course of the next quarter (July-September), growth slipped to just 1.7 per cent. In October, production actually contracted by 4 per cent. Thus there is a clear downward trend.

As per some analysts, as Diwali fell in October, there were fewer working days in the month. This would have impacted production. There is also the base effect to consider. However, the steep fall in October cannot be explained by these alone.

There are two possible explanations for the sharp decline in industrial activity.

First, the slowdown in the global economy, especially in the developed world, has resulted in a severe slowdown in India’s exports, impacting industrial activity. After all, the collapse in industrial production mirrors the decline in the country’s exports over the period — export growth has collapsed from a healthy 25 per cent in the first quarter to contracting by almost 17 per cent in the month of October.
And second, domestic demand has remained subdued in this period, despite the festival period.

What do the data tell us about investment activity and private consumption?

The disaggregated data point towards a sharp slowdown in investment activity and household consumption.

The capital goods segment which provides us with some understanding on investments in the economy had grown by a robust 31.3 per cent in the first quarter. In the second quarter, it slipped to 6.9 per cent. In October, it contracted by 2.3 per cent. Considering that during this period, government capital spending has grown at a steady clip, this perhaps suggests that private sector investment activity is yet to witness a broadbased pick up.

The same trend can be observed in both consumer durables and non-durables though the weakness is of a much greater extent. Consumer durables segment had actually contracted by 1.1 per cent in the second quarter. In October, the contraction deepened to 4.7 per cent.

Similarly, the non-durables segment fell by 6.2 per cent in the second quarter, and by 8 per cent in October. The consumer durables segment has now contracted by three consecutive months, while non-durables have now contracted for four months in a row.

There are two points to be noted here.

First, in the run up to the festive season, there should ideally have been a build up in inventory (stocks of goods) which should have been reflected in this data in the form of better performance. But that has not been the case. Second, these numbers do seem to contradict the robust sales numbers reported for many consumer durables.

What is the outlook for industrial production?

As we move away from the festive months, the outlook does not appear bright. As per the RBI’s own estimates, the economy is likely to grow at just 4.3 per cent in the second half of the year. Tightening global financial conditions, slowing global demand, and the effects of the RBI raising interest rates on domestic consumption, will all determine the extent and the duration of the slowdown in India.