The Economy Observer: IIP growth slows down in March

COPE

IIP growth slows down in March

Broad-based deceleration in manufacturing sector pulls down growth



11 May 2018

The Economy Observer

The Index of Industrial Production (IIP) growth slowed down to 4.4% in March 2018 from 7%+ in the previous three

months, as the favourable base effect dissipated in the month. The number was below our estimate/market consensus

of a 5.6%/6.2% rise.



Lower IIP growth can be primarily attributed to the manufacturing sector, where growth slowed down to 4.4% in March

2018 from an average of 9.1% in the previous three months. The deceleration was broad-based, with ~51% of the sector

(v/s 28% in February 2018) reporting growth of less than 5%. 12 of the 23 industries within manufacturing witnessed a

contraction in output.



As per use-based classification, output of capital goods declined by 1.8% YoY in March after growing in double-digits

over the previous three months. Growth in the output of consumer durables was also weak at 2.9%.

IIP growth decelerated to 4.4% in FY18 from 4.6% in the previous year. We expect growth to come in at ~5.5% in

1HFY19, slightly lower than +6% in 2HFY18. For full-year FY19, we expect growth to improve slightly to 4.6%.



IIP growth slows down to 4.4% in March 2018…:

The Index of Industrial

Production (IIP) rose by just 4.4% in March 2018

(Exhibit 1).

The number is

below our estimate/market consensus of a 5.6%/6.2% rise. Growth slowed

down from 7%+ in the previous three months, as the favourable base effect that

was seen over December 2017-February 2018 dissipated in March.

Broad-based decline in manufacturing pulls down IIP:

Growth in the

manufacturing output dropped to 4.4% from an average of 9.1% in the previous

four months. The deceleration was broad-based, with ~51% of the sector (by

weight) reporting growth of less than 5% in March 2018, up from ~28% in the

preceding month

(Exhibit 3).

As many as 12 of the 23 industries within

manufacturing witnessed a YoY contraction in output in the month. Among the

manufacturing industries, the output of tobacco products, wearing apparels and

electrical equipment fell by over 5% YoY in March 2018. Mining and power

generation rose by 2.8% and 5.9%, respectively, in the month.

Capital goods and consumer durables drag growth:

As per use-based

classification, capital goods production declined by 1.8% YoY in March 2018,

after growing in double-digits over the previous three months. Growth in the

previous three months was largely led by a weak base (December 2016-

February 2017: -3.1%). However, this effect dissipated thereafter (March 2017:

+9.4%), leading to a sharp fall in capital goods production in March 2018.

Growth in the output of consumer durables slowed down to 2.9% in March 2018

from 7.5%+ in the previous two months. Growth in the output of

infra/construction goods and consumer non-durables remained healthy at 8.8%

and 10.9%, respectively, in March 2018.

IIP growth to improve slightly in FY19:

IIP growth decelerated to 4.4% in FY18

from 4.6% in FY17 due to slower growth in mining and electricity generation.

We expect growth to come in at ~5.5% in 1HFY19, slightly lower than +6% in

2HFY18. For full-year FY19, we expect growth to improve slightly to 4.6%.

Nikhil Gupta – Research Analyst

(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555

Rahul Agrawal

– Research Analyst

(Rahul.Agrawal@motilaloswal.com); +91 22 3982 5445

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