INDEX OF INDUSTRIAL PRODUCTIONIIP number or IIP data (Index of Industrial Production) is a measurement which represents the status of production in the industrial sector for a given period of time compared to a reference period of time. IIp number is one of the best statistical data, which helps us to measure the level of industrial activity in Indian economy. Please note that IIP data is a short-term indicator of our industrial growth till the actual results from Annual Survey of Industries (ASI) is published. IIP data is a very important indicator to the Government for planning purposes and is also used by various organizations like Industrial Associations, Research Institutes, Financial Institutes and Academicians.

IIP data is a simple index which provides information about the growth of different sectors of our economy like mining, electricity, Manufacturing & General. The IIP index reflects the growth in India’s industrial activity and excludes all kinds of services. The base year for the index over the period of the analysis is 1993-94.

Another classification is use-based (consumption based), where IIP is classified on the base of use like Basic Goods, Capital goods, Intermediate goods & consumer goods.

The weightage of Indian IIP data is broadly divided into three segments – manufacturing (79.36%), mining & quarrying (10.47%) and electricity (10.17%)...

Manufacturing : includes items like food items, machinery, wood furniture etcElectricity : includes generation and transmission of electricity ( from various sources like - thermal, hydro, solar etc)Mining : includes mining of coal, oil other metals etcManufacturing is the major sector, which is further divided into 17 industry groups like * Food Products* Beverages, Tobacco and related Products* Cotton Textiles* Wool, silk and manmade fibre textiles* Jute and other vegetable fibre textiles* Textile products including wearing apparel* Wood and wood products (furniture & fixtures)* Paper, paper products, printing and allied industries* Leather and leather and fur products* Basic Chemicals & Chemical Products (except products of Petroleum & Coal)* Rubber, Plastic, Petroleum and Coal Products* Non-Metallic Mineral Products* Basic Metal and Alloy Industries* Metal Products and Parts, except Machinery and Equipment* Machinery and Equipment other than Transport equipment

* Transport Equipment and Parts* Other Manufacturing Industries

Usually IIP numbers of a particular month would be published after two months. The date of publishing IIP numbers are usually before noon on the 12th of a month. The dates are indicative based on the previous publishing dates, it can be anywhere between 11th to 14th of a month.

The index is computed using the weighted arithmetic mean of quantity relatives with

weights being allotted to various items in proportion to value added by manufacture in

the base year by using Laspeyre's formula:

I = ∑ (WiRi)/ ∑ Wi.

Where I is the index, Ri is the production relative of the ith item for the month in

question and Wi is the weight allotted to it.

Analysis of IIP for August 2011

Overview:

IIP grew by 4.1% in August 2011 compared with 4.5% in August 2010. In cumulative terms growth was 5.6% during April – August FY12 period compared with 8.7% last year. The present performance comes at a marginally lower rate than was expected. CARE Ratings’ expectation is that the sector can achieve a growth rate of 7% for the entire year, given that demand conditions will improve in the next few months on account of the festival and harvest season. .

Performance of manufacturing and mining has slowed down, which is indicative of a slowdown in the economy. This can be attributed to the increase in interest rates leading to higher borrowing costs; which is also impacting fresh investments in the economy. Industrial performance is likely to pick up over the coming months owing to increased demand on account of the festival season as well as rural spending following the kharif harvest.

Cumulative Performance (April-August over April-August) The IIP showed growth of 5.6% in April - August FY12 compared with 8.7% last

year.

Manufacturing slowed to 6.0% compared with 9.2% last year.

Production of Basic goods, increased by 7.4% followed by Capital goods by 7.2% for the same period.

Consumer goods witnessed slower growth of 4.8% against 8.9% last year. Consumer durable goods grew by 4.3% and consumer non durable grew by 5.1%

Index of Industrial Production (April- August) Growth (%)

FY11 FY12

All Industries 8.7 5.6 Sectoral Classification Mining 7.7 0.2 Manufacturing 9.2 6.0 Food products and beverages

9.2 14.6

Tobacco products

10.9 -4.0

Textiles 5.3 -2.5 Wearing apparel, dressing etc

5.2 -1.1

Luggage and other leather prods

5.8 6.8

Wood & products of wood

5.1 -4.6

Paper and paper products

6.0 5.7

Publishing &printing

11.0 9.0

Coke, refined petroleum products etc

0.3 5.1

Chemicals and chemical products

-1.9 1.9

Rubber and plastics products

18.4 -1.0

Other non-metallic mineral products

4.8 3.0

Basic metals 3.5 14.9 Fabricated metal products

13.4 14.0

Machinery and equipment

34.4 -1.8

Office, accounting & computing machinery

-10.1 12.5

Electrical machinery & apparatus

5.6 1.5

Radio, TV and comm equipment

17.3 1.0

& apparatus Medical, precision & optical instruments etc

16.3 -5.1

Motor vehicles, trailers & semi-trailers

39.4 15.5

Other transport equipment

29.4 17.4

Furniture; manufacturing

-8.2 1.1

Electricity 4.1 9.5 Use based Classification Basic goods 4.9 7.4 Intermediate goods

9.2 1.0

Capital goods 18.9 7.2 Consumer goods 8.9 4.8 Durable goods 16.3 4.3 Non durable goods

3.4 5.1

Food products and metals perform well Mining continues to disappoint Electricity doing well Cumulative picture is mixed

The cumulative picture for industry shows that growth during the five-month period has increased in case of food products, luggage, coke products, basic metals, metal products, chemicals and chemical products. This is a positive sign.

Interest rates hurting industry

However, machinery growth has been lower for electrical and non-electrical levels indicating a slowdown in investment. The impact of higher interest rates has shown in terms of investment slowing down in this period. The growth rates for the motor vehicles and other transport equipment groups have been impressive at 15.5% and 17.4% respectively.

Exports and imports buoyant

During April - September 2011, exports were $ 160 bn while imports were $ 233.5 bn. The trade deficit was 73.5bn. Growth in exports in September was 36.3% and imports 17.2%, showing minimum impact of global economic conditions. Therefore, the performance for the first six months of the year has been impressive with exports growing by 52% and imports by 45%.

Bank credit declining

Bank credit has increased by 2.6% in the financial year so far up to August 26 compared with 3.4% last year. This is indicative of slower economic activity.

Prospects for industry

Growth in industry for FY12 is expected to be around 7%. Against this target, growth of 5.6% during the first 5 months of the year is quite reasonable considering that this is the slack season when typically demand is low. Demand should pick up in the second half of the year which makes the target of 7% achievable. However, high interest rates have had a perceptible impact on investment, as reflected in low growth in the machinery segment. Also the slowdown in credit-based industry like automobiles will continue to exert pressure downwards on this number. Therefore, RBI policy action as well as the growth of the consumer durable segment will hold the clue for growth prospects.

Core inflation

Core inflation continues to be high. The annual rate of inflation, based on monthly WPI for manufactured products stood at 7.79% in August 2011 compared with 5.16% during the corresponding month of the previous year.

Likely RBI action

RBI’s focus will be on inflation control and a lot depends on the core inflation number for September. Given that monetary policy action is effective in controlling demand and hence core inflation, its policy action will be geared by movements in core inflation. There is reason to believe that the RBI may take a pause given that its policy action has had its impact in terms of slowing down growth. However, it may choose to persevere with interest rate hikes as part of its anti-inflation stance that it had taken in its Annual Policy announced in May 2011.

BY:

Abha Mahapatra (BFIA II A, 75003)

Ayushi Negi (BFIA II A, 16003)