CRISIL EFC

November 2011

Economy First Cut - IIP

Mining and capital goods sector pull down industrial growth

Overview: Industrial output growth declined further to 1.9 per cent in September 2011 as compared to 3.6 per cent recorded in August 2011. This is the third consecutive month when the industrial output growth has remained sluggish. Like previous month, industrial output growth in September 2011 remained low again due to poor performance of the mining sector. Policy inaction, regulatory hurdles and late monsoon rains in eastern India has adversely impacted the mining sector output. Rising interest costs, domestic policy/regulatory hurdles coupled with the inability of EU to fix its sovereign debt crisis has clearly made the industrial growth weaker now. Therefore, we expect industrial output to grow at 6.5 per cent in FY12 as compared with 8.2 per cent in the previous fiscal. Industrial output growth has now showed a decline for three consecutive months. This indicates that weakness in industrial output is no longer a one-off phenomena and has acquired the character of a trend. For the month of September 2011, the seasonally-adjusted m-o-m series contracted by 0.48 per cent. Manufacturing output grew at a dismal 2.1 per cent in September 2011 as compared to 4.0 per cent in the previous month. At the 2-digit classification of manufacturing, 8 out of 22 industry groups showed negative growth in September 2011 as compared to 3 during the same month previous year. Mining sector continues to disappoint. It contracted by 5.6 per cent in September 2011. Even for the period April-September 2011, it shows a contraction of 1 per cent. However, electricity sector witnesses a healthy production in September and grew at 9 per cent. Although capital goods growth moved into the positive territory in August 2011, it remained weak at 3.9 per cent as compared to 4.7 per cent in the same month last year. Capital goods growth once again moved into the negative territory in September 2011 and recorded a growth of -6.8 per cent as compared to 4.1 per cent a month ago. Onset of the festival season seems to have provided some boost to consumer durable which had been adversely impacted by the RBIs monetary tightening. Consumer durables clocked a growth of 8.7 per cent in September 2011 as compared to 5.5 per cent in the previous month. Intermediate goods following the trend of the past few months once again recorded a poor growth of 1.4 per cent in September 2011. Persistent sluggishness in intermediate goods growth is reflective of underlying weakness in capital and consumer good sectors.

General Manufacturing Mining Electricity Basic Capital Intermediates Consumer Goods -Durables -Non durables

Weight 1000.00 755.27 141.57 103.16 355.65 92.57 265.14 286.64 53.65 232.99

Sep-10 6.2 6.8 4.3 1.8 3.5 7.2 4.6 9.6 14.2 5.87

July-11 3.8 3.2 1.5 13.1 9.5 -13.7 -0.6 7.7 9.0 4.2

Aug-11 3.6 4.0 -4.1 9.5 5.2 4.1 1.9 2.2 5.5 -0.6

Sept-11 1.8 2.1 -5.7 9.0 4.5 -6.8 1.4 3.5 8.7 -1.3

Apr-Sep FY11 FY12 8.2 5.0 8.8 7.2 3.8 4.7 16.4 8.4 9.0 15.9 3.8 6.0 -1.0 9.4 7.9 4.6 0.8 4.5 5.2 3.8

Core sector industries growth low (y-o-y, %)

y-o-y% 20 15 10 5 0 -5 -10 IIP-General Core Industries

Consumer goods growth remains weak (y-o-y, %)

y-o-y% 80 60 40 20 0 -20 -40 Capital Goods Consumer goods

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11 Sep-10 Mar-11

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Source: CSO

Sep-11

Source: CSO

The growth in core sector slipped further to 2.4 per cent in September 2011 as compared to 3.5 per cent in August 2011, mainly due to poor performance and contraction in output of coal, natural gas and fertilizer. The core sector has a weight of 38 per cent in total IIP.

Consumer goods sector witnessing somewhat better growth in September 2011 as compared to August 2011 due to the impact of festival demand. Amongst consumer goods, it is the durables growth that accelerated to 8.7 per cent, while non-durables contracted by 1.9 per cent in September 2011. The core
sector has a weight of 38 per cent in total IIP.

Forward-looking Indicators
% 80 60 40 40 20 0 -20 -40 20 0 -20

Exports (y-o-y%)

m-o-m SA exports

y-o-y% 80 60

Passenger vehicles sales

2Wheeler sales

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Source: Ministry of Commerce & CRISIL Research

Source: Society for Indian Manufacturers Association (SIAM)

Although exports so far have remained buoyant this fiscal, the underlying weakness in its growth momentum is showing up in the seasonally-adjusted m-o-m series. So going forward we expect exports to moderate. Rising interest rates and higher fuel prices have adversely impacted passenger car sales, as it grew at 2.9 per cent in September 2011, as compared to 21.3 per cent growth a year ago. However, two wheeler sales growth has remained robust at 24.4 per cent in September 2011.

Mar-10

Sep-11

Sep-11

ee to wipe gains from easing crude oil

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Last updated: 31 March, 2011 Contacts: Sunil Sinha Head & Senior Economist Email: susinha@crisil.com Phone: +91 11 42505120 Anuj Agarwal Economist Email: akagarwal@crisil.com Phone: +91 11 42505189

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