Published on 14/02/2017 5:29:10 PM | Source: Religare Capital Markets Ltd

December16 IIP contracts 0.4% - Demonetisation-led slowdown hurts output - RCML

Dec’16 IIP fell by 0.4% YoY as the demonetisation-led demand crunch hurt manufacturing output, with 17 of 22 manufacturing industries posting declines. Consumer durables/non-durables were the worst hit (output down 10.3%/5%) even as healthy growth in electricity and mining output supported the headline number. Given that output is affected with a lag, industrial production is likely to remain weak over the next few months until demand conditions normalise.


* Dec’16 IIP declines by 0.4%:

IIP declined by 0.4% in Dec’16 (consensus: +1.2%) after rising by a sharp 5.7% in Nov’16. The decline was led by a 2% drop in manufacturing output, even as healthy growth in electricity generation and mining output partially cushioned the impact.


* Demonetisation-led demand crunch hits manufacturing…:

Manufacturing output declined by 2% in Dec’16 on account of demand destruction caused by demonetisation. The decline is not sharp when compared to the average 0.3% drop seen during Apr-Nov’16. However, note that the headline manufacturing number was distorted by an anomaly caused by “cable, rubber insulated” during the first 7 months of FY17 – the output of this item had declined by 85-90% during this period (this anomaly corrected in Nov’16). Excluding this item, manufacturing output was actually 3.4% higher YoY during AprNov’16 (Dec’16: -2.3%). As many as 17 of the 22 industries within manufacturing saw an output decline in Dec’16.


* …consumer goods the worst hit:

The consumer durables/non-durables segments saw a sharp 10.3%/5% drop in output during Dec’16 due to slowdown in demand post demonetisation. The decline was along expected lines as production is usually affected with a lag. Production of food products (-3.5%), tobacco products (-8.8%), textiles (-6.6%), apparels (-8.1%), leather products (-14%) and furniture & other items (- 12.9%) declined in the month. 2W/3W/car/CV output fell by 25.2%/43.3/1%/19.3% as auto companies shut down manufacturing units for extended periods owing to weakness in demand.


* Electricity, mining support IIP:

Electricity generation (10.3% weight in IIP) rose by 6.3% YoY in Dec’16; growth has picked up in the last two months and averaged at 7.6% vs. 4.7% during Apr-Oct’16. The pick-up has largely been on account of a favourable base (Nov-Dec’15:+1.9%); PLFs at thermal power plants (~80% of electricity generated) remained low (at ~60%). In fact, growth slipped in Jan’17; as per the Central Electricity Authority (CEA), electricity generation rose by just 3.5% in the month while PLFs at thermal plants remained subdued at 60.4% (Jan’16: 63.5%) amid poor demand from discoms. Growth in mining output (14.1% weight in IIP) touched a six-month high of 5.2%, supporting the headline IIP number.


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