Industrial growth slows to 1.4% in November

Industrial production, also referred to as the factory output, gauged by the Index of Industrial Production (IIP), grew by 1.4% in November, compared to the revised figure of 4% in October.

The 1.4% YoY growth in industrial production in Nov’21, its slowest in 8 months, can be attributed to a waning low base effect. The growth of 1.4% is even lower than the 1.6% growth registered in the pre-pandemic month of November 2019. In the period between Apr-Nov’21, industrial production grew by 17.4%, compared to a contraction (de-growth) of 15.3% in the corresponding period a year ago. Subdued investment weighed on the Index of Industrial Production (IIP), data released by the National Statistical Office showed. The weakening consumption and investment trends will now require the government to carry the burden of bailing the economy out of its sluggish growth by increasing its capital expenditure.

Sectoral Production

The IIP is the weighted average of 3 indexes - manufacturing, mining, and electricity. The relative weight of these in the Index is manufacturing (77.6%), mining (14.4%), and electricity (8%). The sector composition is one of the ways to classify the products in IIP, under which a basket of products is grouped under manufacturing, mining, and electricity.

The manufacturing sector, which comprises 77.6% of the index of industrial production, grew at its slowest pace in the year by 0.9% in November. This was much lower than the pre-pandemic month of November 2019 where the sector registered a 3% growth. The mining output increased by only 5% in comparison to 11.5% in October while Electricity grew by 1.1% compared to 3.1% a month earlier. Within the manufacturing sector, the production of motor vehicles, trailers, and semi-trailers contracted by 9.2% in November. The manufacturing of other transport equipment declined 22.4% in November compared to a decline of 15.6% in October. The chip shortage across the globe has had an impact on the production numbers as confirmed by various auto manufacturers.

“The economy is still in the midst of both anaemic investment and consumer demand. This can be inferred from the fact that both capital and consumer durable goods, despite a favourable base recorded a de-growth of 3.7% and 5.6% in November 2021. It appears that the nascent recovery is still facing headwinds resulting in all the sectors at the use-based level falling short of the pre-Covid level in November 2021”, Sunil Kumar Sinha, Principal Economist, India Ratings said.

Use-Based Production

The IIP also constitutes 6 use-based weighted-average indexes. The relative weight of these in the overall IIP are - Primary Goods (34%), Capital Goods (8.2%), Intermediate Goods (17.2%), Infrastructure/Construction Goods (12.3%), Consumer Durables (12.8%), and Consumer Non-Durables (15.3%). This is another way to classify the products in IIP under which products are grouped by the use to which they are put to.

The output of capital goods - a significant barometer of investment, declined by 3.7% in November. Consumer durables output declined by 5.6% while consumer non-durables output increased by 0.8%. The fact that consumer durables suffered the biggest month-on-month contraction in November gives support to the theory that pent-up/festive demand imparted only a seasonal boost to economic activity in October. The capital and consumer durables goods numbers do not present any optimistic picture for the industrial sector and point to the weak demand conditions in the economy. The continued contraction in capital goods production could impact down-the-line factory production. Only intermediate goods (2.5%) and infrastructure/construction goods (3.8%) provided some support to the industrial growth in November. 

The factory output of the eight core sectors (Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement, and Electricity), also known as the infrastructure output, grew 3.1% in November compared to 8.4% in October. The eight core industries consist of 40.27% of the weight of items that are included in the Index of Industrial Output (IIP). The growth in the factory output of the 8 core sectors was led mainly by the coal and natural gas sectors.

Reference Reading

What is the Index of Industrial Production (IIP)?

The Index of Industrial Production (IIP) reflects the growth of core industrial sectors in an economy. The IIP is a composite indicator that measures the short-term changes in the volume of production of a basket of industrial products during a given period. It essentially takes a basket of industrial products and creates an index by assigning different weights to different products. Growth in industrial production is determined by comparing the monthly values of this index with the index value in the same month last year. This rate of growth (positive or negative) in IIP signals India’s industrial health or the lack of it.

The IIP is the weighted average of 3 indexes - Mining (14.4%), Manufacturing (77.6%), and Electricity (8%). In addition, the IIP also constitutes 6 use-based weighted-average indexes - Primary Goods (34%), Capital Goods (8.2%), Intermediate Goods (17.2%), Infrastructure/Construction Goods (12.3%), Consumer Durables (12.8%), Consumer Non-Durables (15.3%). Eight core Industries (Coal, Crude Oil, Natural Gas, Refinery Products, Fertilizers, Steel, Cement and Electricity) comprise 40.27% of the weight of the items included in IIP which is tracked through the Index of Infrastructure Output. Some sectors may outperform others due to a variety of reasons, such as growth prospects, position in the business cycle, government policy, international factors, etc.

IIP is a short-term measure of industrial growth till the outcomes from the Annual Survey of Industries (ASI) and National Accounts Statistics such as GDP are available. It is compiled and published monthly by the National Statistical Office, MoSPI six weeks after the reference month ends.

The Base Year for the IIP is 2011-12 with a value of 100. So, if the index for mining in Mar'20 is say 132.7, it implies that compared to the 2011-12 index value of 100, mining has performed at a growth rate of 32.7% in 8 years.