Industrial Production grows at 0.4% in December, its slowest pace in 10 months

Industrial production, also referred to as the factory output, gauged by the Index of Industrial Production (IIP), grew by 0.4% in December, compared to the revised figure of 1.3% in November.

The 0.4% YoY growth in industrial production in Dec’21, its slowest in 10 months, triggered concerns over the slackening pace of economic recovery just as the benefits of a low base effect begin to wear off. In the period between Apr-Dec’21, industrial production grew by 15.2%, compared to a contraction (de-growth) of 13.3% 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. The massive capex spend announced in the 2022-23 Budget is expected to encourage private investment and boost employment.

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, registered a negative growth of 0.1% in December, its lowest level since April. Within the manufacturing sector, the production of electrical equipment registered the sharpest fall of -15.6%, followed by the production of machinery and equipment at -13%. The production of computers and electronic products  witnessed the biggest YoY increase of 36.5%, followed by furniture at 9.6%.

The mining output increased by only 2.6% in comparison to 4.9% in November while Electricity grew by 2.8% compared to 2.1% a month earlier.

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 (eg. machinery) declined by 4.6% in December. The steady decline in the output of capital goods, a significant barometer of investment, could impact down-the-line factory production in the coming months. Consumer durables (eg. garments, passenger vehicles) output declined by 2.7% marking the eighth consecutive month of declining growth. The output of consumer non-durables (eg. toiletries, medicines) declined by 0.6% in comparison to a growth of 0.5% in November. Typically, the consumer non-durables category should not see many contractions given that these products are relatively cheaper and regularly required for consumption by a majority of India's population. A de-growth of 0.6% shows that a majority of India's population is beginning to hold back on essential purchases. The subdued consumer demand, in turn, could impact the demand for intermediate and capital goods. The growth in primary goods (2.8%), intermediate goods (0.3%) and infrastructure/construction goods (1.7%) provided some support to the overall industrial growth in December. 

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 3.8% in December compared to 3.4% in November. 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 fertilizer 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.