Nov IIP may grow, sustainability doubtful

As growth of eight core industries rebounded to a robust 6.8 per cent in November, industrial growth is likely to be positive for the month after a contraction in October.

But it might prove a blip, particularly in December and March, because of the high base effect.

Industrial growth was a negative 5.1 per cent in October, when even revised core sector growth was just 0.3 per cent. The index of industrial production (IIP) was 158.1 points.

As the base in November 2010 was 158, even if the IIP last month remained stable sequentially, industrial production will show slight growth in November.

Also the index of eight core industries has a 38 per cent weightage in the IIP and would boost factory output numbers to an extent.

However, to match the IIP’s high base of 175.6 points in December last year and 193.1 points in March seems Herculean. Are we to see more contractions in industrial production in the coming months?

Economists say IIP growth would definitely moderate. Anis Chakravarty, director, Deloitte, Haskins and Sells, told Business Standard: “A one-off number in the index of eight core industries in November is definitely not sustainable. The base will come to play in December, muting the industrial growth.”

He said that unless there was a structural change, “We are not seeing any sustainable growth in IIP”. In November, Chakravarty said, factory output would expand between four and five per cent, given the one-off high eight core industries growth number.

“We do not see any turnaround till the first quarter of next financial year,” he forecast.

Coal output expanded 4.9 per cent in November after contracting for three months. But Chakravarty said the overall trend was a declining one.

Madan Sabnavis, chief economist, CARE Ratings, said, “Yes, the high base effect will come into play in December and March, and we may see contraction on that front. But I am hoping that the index of eight core trend is sustainable.”

Siddharth Shankar, director, KASSA, said, “On a year-on-year basis, we will see the IIP falling in December. In fact, on a sequential basis, we will see continuous contraction till June 2012.”

The IIP contracted for three months this financial year, rose in two months and remained flat in one month sequentially.

As for the index of the eight core industries, there is a high base coming into play during December, when the index grew a robust 6.2 per cent in 2010-11, against just 3.7 per cent in November. Therefore, the IIP may also not get the eight core industries cushion in December.