A sedate 2.7 per cent growth in the Index for Industrial Production (IIP) for November, the lowest in 18 months has once again raised the debate of slowing manufacturing activity. While the headline figure has often been misleading, for now it may be fair to assume that the Index' met with speed-breakers in the form of festive destocking activities as well as increased holidays.

Nevertheless, looking beyond the headline numbers may be crucial to unravel pockets of slowdown if any. For instance, further slippages in some of the vital components of IIP — intermediate goods and consumer goods — over the next couple of months may well alter the IIP's current run rate of 9.5 per cent (year to date), before the end of FY-11.

Strain on consumer spending?

This leads us to dig into those segments that faced the ‘festival-impact', to rule out the effect of one-off events. The consumer durables and, to some extent, consumer non-durables segments have traditionally seen a dip in the indices in the Diwali month as inventories are typically built up in advance. Seen in this light, after 30 per cent growth clocked in the month of October, the dip to 4.3 per cent growth seen in November in the consumer durable space does not appear alarming. That said, the end of the festive season may well be an inflection point for the durables space. With festive discounts coming to an end, manufacturers may not be able to keep prices steady for long, with input costs increasingly pressuring margins for companies in this space. Production in the next 2-3 months would offer clues as to whether durables producers would stick to higher volumes clocked earlier at the cost of profit margins or sacrifice volumes to maintain profitability. In the listed space, this would be a fine balancing act, as most companies already command premium valuations.

A more disconcerting pattern emerges from the consumer non-durables segment which receives a good 23 per cent weight in the use-based classification of IIP. This index, which has traditionally witnessed sluggish growth , fell by a sharp 6 per cent; a fall not seen in the Diwali month for over eight years now.

While the press note on quick estimates for November notes a sharp dip in production of rice bran oil and hair oil, the more key festive non-discretionary goods such as wheat, maida and sugar (which have high weights) may also have seen lower demand on the back of inflationary pressures. The fortunes of this segment and companies that manufacture FMCGs may well depend on inflationary trend.

Going by current trends, the sector faces the risk of being caught in a vicious cycle. While the wage hike in the MNREGA scheme urges one to believe that the rural consumption story may well continue, the same may further stoke inflation and turn counter-productive.

Higher resilience

While the consumer industry thus appears to be on a tightrope walk, the non-consumer goods manufacturing sector has shown more resilience, at least in some segments. Basic goods that include steel castings and electricity have sustained their growth pace between April and November compared with a year ago. This, despite considerable weakening in one of its key goods — cement.

In other words, commodity players in sectors such as minerals, metals, petro products and chemicals have recorded a steady increase in production of goods used as inputs in other industries.

The capital goods index too has remained buoyant, although one of its key components, industrial machinery, witnessed a pronounced dip in November. This trend, if sustained in ensuing months, may sound off a slowdown in industrial capex. Even so, the capital goods index remains on a safe wicket for now, as a good proportion of the components in the basket are utilised in the power, offshore energy and infrastructure sectors that are expected to gain ground this year.

The intermediate goods index is one non-manufacturing segment that has slipped quite a bit compared with last year. Its growth has slackened from 11.2 per cent a year ago (April-November) to 9.6 per cent. This index consists of a number of semi-processed goods used as inputs in textiles and construction as well as auto ancillaries and parts. Any further dip in this index could have a ripple effect on both the basic and capital goods space.

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