Why IIP\’s -5.1% industry slump doesn\’t make sense

Government data is often dismissed as too good to be true. But the October data for industrial production, minus 5.1% overall and minus 6% for manufacturing, is too bad to be true. Either it will be revised upward substantially, or turn out to be a statistical blip. It is simply not compatible with an economy once expected to register 8% GDP growth, and still on course to deliver maybe 7%.

Mining output is down 7%, and could be explained by bans on iron ore mining, a late monsoon curbing coal production, and falling gas production at the KG Basin. But electricity generation, which is highly correlated with industrial production, rose 5.6% in October. Indeed, it rose 8.9% in April-October, one of the highest rates in recent years. Where did it all go if not into industrial production? Agricultural and domestic consumption could not have absorbed it all.

Corporate data for the July-September quarter showed sales rising by around 20%, of which maybe half represented higher Price:s and half higher production. If sales were so good till September, could they have suddenly gone into reverse gear in October?

Given the high base (industrial growth in October 2010 was 11.3%), many analysts had thought the figure for October 2011 would be flat or marginally negative. But minus 5.1% looks off the charts.

Advance tax data has just come in for the quarter October-December. Many industrial companies have paid substantially more advance tax, while ICICI Bank\’s advance tax is flat. This is not compatible with a huge crash in output.

Capital goods production is down 25%. This looks too high even given that investment has certainly been hit by an economic slowdown, political uncertainties, and lack of coal and environmental clearances. Machine tool production is actually up 31.4 %, and that normally suggests strong industrial production. Yet this has been more than offset by huge slumps in electrical machinery (-58.8%), cement machinery (-74.6%) and cables (-82.9%). Import data shows a 27% increase in machinery imports in April-November, and this does not suggest an investment strike by corporations at all.

In October, the production of consumer durables is reported to be down 0.3%, and of non-durables by 1.3%. This suggests very deficient demand and a serious recession. Yet inflation remains over 9%, which suggests plentiful demand. Commodity Price:s globally are not higher than a year ago, but are higher in India because of rupee depreciation. Yet this cannot explain why inflation is a high 8% for non-food manufacturing.

In sum, it would be a serious mistake to take the October industrial data at face value. Industrial production is indeed slowing, and the cumulative April-October trend of 3.7% may be close to the mark. But minus 5.1 % is simply too bad to be true.