Industrial production eases marginally to 3.2% in October

Industrial production, also referred to as the factory output, gauged by the Index of Industrial Production (IIP), increased at its slowest pace in 8 months at 3.2% in October 2021, compared to the revised figure of 3.3% in September 2021.

The 3.2% growth in industrial production in Oct’21 can be attributed to a waning low base effect. In the period between Apr-Oct’21, industrial production grew by 20%, compared to a de-growth of 17.3% in the year-ago period. Subdued investment weighed on the Index of Industrial Production (IIP) despite festive demand, data released by the National Statistical Office showed. Even the festive demand was not able to positively influence the IIP growth in October. The weak 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. 

Economists foresee November having even further subdued activities based on the e-way bills figures. The generation of e-way bills fell to 6.15 million in November from 74.5 million in October implying slow growth in industrial activities that may drag down GDP growth in the third quarter. The Reserve Bank of India’s monetary policy committee (MPC) has revised downward GDP growth to 6.6% in the quarter compared to its earlier calculation of 6.8%.

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 2% in October in comparison to 4.5% a year ago. The mining output increased by 11.4% in comparison to 8.6% in September while Electricity grew by 3.1% compared to 0.9% in September. Within manufacturing, motor vehicles, trailers, and semi-trailers showed a decline in production, and the segment contracted by 12.6% in October. The manufacturing of other transport equipment declined 15.6% in October compared to a decline of 18.5% in September. The chip shortage across the globe has had an impact on the production numbers as confirmed by various auto manufacturers.

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 1.1% in October. Consumer durables output declined by 6.1% while consumer non-durables output increased by 0.5%. A contraction in capital goods could impact down-the-line factory production. Capital and consumer durables goods did not present any optimistic picture for the industrial sector and point to the weak demand conditions in the economy. Only intermediate goods (2.1%) and infrastructure/construction goods (5.3%) provided some support to the growth.

“Even as the ongoing supply challenges in the auto sector persisted, the y-o-y performance of several other high-frequency indicators deteriorated in November 2021, including electricity demand, GST e-way bills, port cargo traffic etc. suggesting that economic activity lost steam after the festive season ended, with the satiation of pent up demand. Accordingly, the IIP growth may print sub-3 per cent in the just-concluded month, in spite of the low base (-1.6 percent in Nov 2020). The disaggregated data does not provide convincing signals of the recovery becoming durable and broad-basing.” Aditi Nayar, chief economist, ICRA Ratings said.

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 7.5% in October 2021 compared to 4.5% in September 2021. 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, natural gas, and cement 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.