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OVERVIEW

The Index of Industrial Production (IIP) contracted by 0.6% in December 2012 (refer Chart 1 and Table 1) relative to the 2.7% expansion in December 2011, reflecting a broad-based weakness with de-growth in consumer goods, capital goods and intermediate goods. The initial IIP growth estimate is inferior as compared to the market expectation of a 1.1% industrial expansion in December 2012. The de-growth of industrial production in December 2012 was led by a sharp and unexpected 8.2% decline in consumer durables output in year-on-year (y-o-y) terms (refer Chart 3), as compared to the modest 5.1% growth in December 2011. The consumer durables sub-index contracted by 9.3% in December 2012 as compared to November 2012, in contrast to the trend observed in the previous three years, which may reflect a draw-down of inventory by producers in response to the sluggish outlook for consumer demand. Additionally, consumer non-durables contracted by 1.4% in December 2012 relative to the robust 13.8% growth in December 2011. Overall, the pace of growth of consumer goods improved mildly to 2.5% in Q3FY13 from 1.4% in the previous quarter, suggesting that consumer demand remains weak in light of the persistently high food inflation. Reflecting the base effect, the de-growth of capital goods eased to 0.9% December 2012 (-16.0% in Dec 2011) from 8.5% in November 2012 (-4.7% in Nov 2011), even though there is no visible uptick in industrial activity. Intermediate goods displayed a mild 0.1% de-growth in December 2012 as compared to the 1.5% contraction in December 2011. Basic goods expanded by a low 2.6% in December 2012 relative to the 5.5% growth in December 2011. In terms of the sectoral classification, IIP growth was dampened by the 4.0% contraction in mining & quarrying output in December 2012 (refer Chart 2), reflecting the de-growth in coal (0.2%) and natural gas (14.9%). The manufacturing sector contracted by 0.7% in December 2012 relative to the 2.8% expansion in December 2011. The components of this sector continued to display substantial volatility, with 12 of the sub-sectors of the manufacturing sector (with a weight of 34.1% in the IIP Index) undergoing a contraction in December 2012. Electricity generation expanded by 5.2% in December 2012, lower than the 9.1% growth recorded in December 2011. This reflects the moderation in growth of thermal electricity generation (to 7.3% in Dec 2012 from 10.5% in Dec 2011) as well as the sharper de-growth of hydroelectricity generation (to 10.8% in Dec 2012 from 0.3% in Dec 2011) according to data released by the Central Electricity Authority (CEA). The pace of contraction of industrial production in November 2012 has been revised to 0.8% from the initial 0.1%, led by a weaker performance of all five use-based segments. Industrial expansion stood at a low 2.1% in Q3FY13, which represents a slight improvement as compared to the preceding four quarters, suggesting a bottoming out of industrial growth.

OUTLOOK: The pace of growth of electricity generation is likely to improve in January 2013 relative to the 5.2% growth in December 2012, given the easing of the base effect. The performance of the mining & quarrying sector is expected to remain weak in the near term until issues related to environmental approvals are resolved and restrictions on mining of iron ore in various States are lifted. With no visible uptick in investment activity, a weakening of the base effect is expected to result in a deeper contraction of capital goods in January 2013 relative to

ICRA RESEARCH SERVICES

INDEX OF INDUSTRIAL PRODUCTION DECEMBER 2012

Industrial output contracts by 0.6% in Dec’12 with broad-based weakness in manufacturing and de-growth in mining February 2013

MAY 2012

Contacts: Aditi Nayar +91 124 4545 385 aditin@icraindia.com

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the previous month. Data released by the Society of Indian Automobile Manufacturers (SIAM) indicates an improvement in growth of two-wheelers to 12% in January 2013 from 3% in April-December 2012, which is an encouraging signal regarding consumption behaviour. Nevertheless, the pace of growth of consumer goods output is unlikely to display a sharp improvement in the near term given the anticipation of a gradual moderation in inflation. Overall, industrial growth in January 2013 is likely to show a mild improvement relative to the de-growth witnessed in the preceding two months.

Table 1: Trend in IIP Growth

Sectoral Use-Based Classification IIP Mining Manufacturing Electricity Basic Capital Intermediate Durables Non-Durables

Weight 100.00% 14.16% 75.53% 10.32% 45.68% 8.83% 15.69% 8.46% 21.35%

Month

Nov-11 6.0% -3.5% 6.6% 14.6% 6.5% -4.7% 1.3% 10.4% 15.0%

Dec-11 2.7% -3.3% 2.8% 9.1% 5.5% -16.0% -1.5% 5.1% 13.8%

Nov-12 -0.8% -5.5% -0.6% 2.4% 1.5% -8.5% -1.6% 1.3% -1.6%

Dec-12 -0.6% -4.0% -0.7% 5.2% 2.6% -0.9% -0.1% -8.2% -1.4%

Apr-Dec FY12 3.7% -2.6% 4.0% 9.4% 6.3% -2.9% -0.7% 5.1% 6.1%

Apr-Dec FY13 0.7% -1.9% 0.7% 4.6% 2.7% -10.1% 1.6% 3.7% 1.7%

Source: Central Statistics Office (CSO), ICRA Analysis

Chart 1: Year-on-Year Growth in IIP Chart 2: Year-on-Year Growth in Sectoral Indices

Source: CSO; ICRA Analysis Source: CSO; ICRA Analysis

-8%

-4%

0%

4%

8%

12%

16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

Mining Manufacturing Electricity

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SECTORAL GROWTH Manufacturing: Manufacturing output displayed a de-growth of 0.7% in December 2012, similar to the 0.6% contraction in November 2012. Reflecting the base effect, manufacturing growth improved to 2.6% in Q3FY13 (1.1% in Q3FY12) from 0.2% in Q2FY13 (3.4% in Q2FY12). Overall, manufacturing output has expanded by a marginal 0.7% in April-December 2012 relative to the modest 4.0% expansion in April-December 2011. The number of sub-sectors of the manufacturing sector displaying a contraction declined to 12 in December 2012 from 14 in November 2012 (refer Tables 2 and 3). Additionally, the combined weight of the sub-sectors undergoing contraction eased to 34.1% in December 2012 from 37.5% in November 2012. Moreover, the pace of de-growth of the sub-sectors undergoing contraction narrowed slightly to 10.8% in December 2012 from 11.1% in November 2012. Chemicals and chemical products (with a weight of 10.1% in the IIP Index) contracted by 0.2% in December 2012, similar to the 0.3% de-growth in November 2012. The contraction of other non-metallic mineral products eased from 9.8% in November 2012 to 3.5% in December 2012. The pace of de-growth of motor vehicles, trailers & semi-trailers improved to 13.1% in December 2012 from 18.7% in November 2012. Data released by CSO indicates that ‘commercial vehicles’ contracted by 20% in December 2012 (refer Annexure B). Additionally, data released by SIAM indicates a 1% de-growth in production of passenger vehicles in December 2012.

Machinery and equipment N.E.C displayed a lower de-growth of 12.1% in December 2012 relative to 18.1% in November 2012. Items such as ‘tractors’ and ‘plastic machinery incl. moulding machinery’ contracted by more than 20% in December 2012 (refer Annexure B). The pace of de-growth of fabricated metal products, except machinery & equipment has worsened to 14.3% in December 2012 from 1.9% in September 2012. The de-growth of this sub-sector in December 2012 was led by the significant contraction witnessed by items such as ‘boilers’ and ‘stampings and forgings’ (refer Annexure B). Office, accounting & computing machinery and publishing, printing & reproduction of recorded media displayed a contraction of 20.8% in December 2012, similar to the 21.9% de-growth in November 2012.

Table 2: Sub-Sectors Displaying Contraction in December 2012

Source: CSO, ICRA Analysis Table 3: Sub-Sectors Displaying Contraction in December 2012

Source: CSO, ICRA Analysis

Oct 2012 Nov 2012 Dec 2012 Number of Sub-Sectors 4 14 12 Weight in the IIP Index 6.3 37.5 34.1 Combined Growth -3.7% -11.1% -10.8% Contribution to Growth -0.3% -5.1% -5.2%

Sub-Sectors Weight Growth in Dec 2012

Comment

Chemicals and Chemical Products 10.1 -0.2% Contracted in Nov 2012

Other Non-Metallic Mineral Products 4.3 -3.5%

Motor Vehicles, Trailers & Semi-Trailers 4.1 -13.1%

Machinery and Equipment N.E.C. 3.8 -12.1%

Fabricated Metal Products, except Machinery & Equipment

3.1

-14.3%

Wearing Apparel; Dressing Dyeing of Fur 2.8 -8.2%

Rubber and Plastics Products 2.0 -3.3%

Publishing, Printing & Reproduction of Recorded Media

1.1 -24.0%

Wood & Products Of Wood & Cork 1.1 -19.3%

Medical, Precision & Optical Instruments, Watches and Clocks

1.0 -27.4%

Office, Accounting & Computing Machinery

0.3 -20.8%

Radio, TV and Communication Equipment and Apparatus

1.0 -19.8% Expanded in Nov 2012

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The pace of de-growth of medical, precision & optical instruments, watches & clocks worsened to 27.4% in December 2012, from around 12.0% each in the previous two months.

Wearing apparel; dressing and dyeing of fur displayed a de-growth of 8.2% in

December 2012, higher than the 1.4% contraction recorded in November 2012. The pace of contraction of rubber and plastics products eased to 3.3% in December 2012 from 9.4% in November 2012. Wood & wood products contracted by 19.3% in December 2012, recording a de-growth for the sixth consecutive month. Data released by CSO indicates that ‘block board’ contracted by 30% in December 2012 (refer Annexure B). In contrast, furniture manufacturing N.E.C displayed a robust 18.8% growth in December 2012, partly led by 24.5% growth of ‘gems and jewellery’ as well as a sharp 23.8% growth of ‘wood furniture’. Publishing, printing & reproduction of recorded media witnessed a contraction of 24.0% in December 2012, similar to the 23.8% contraction in November 2012. This primarily reflects a 25% contraction in ‘newspapers’ (with a weight of 1.0% in the IIP Index) in December 2012 (refer Annexure B). Moreover, radio, TV and communication equipment and apparatus displayed a contraction of 19.8% in December 2012, partly reflecting the 21.1% contraction in ‘telephone instruments’ (refer Annexure B).

The pace of growth of the five sub-sectors making the highest contribution to manufacturing growth increased to 10.9% in December 2012 from 10.3% in November 2012 (refer Table 4). The pace of growth of electrical machinery and apparatus almost doubled to 48.2% in December 2012 from 24.8% in November 2012, led by the striking 133.6% and 82.3% expansion of ‘cable, rubber insulated’ and ‘conductor, aluminium’, respectively in December 2012 (refer Annexure B). Such high growth in these items is puzzling, given the otherwise lacklustre performance of capital goods output. Excluding the contribution of this sub-sector, the IIP Index would have contracted by around 2.5% in December 2012. Basic metals expanded by 6.2% in December 2012 compared to 7.0% in November 2012. Coke, refined petroleum products & nuclear fuel expanded by 9.3% in December 2012 as compared to 8.5% in November 2012, benefitting from the healthy growth of ‘petroleum coke’ and ‘gas, liquefied petroleum’ (refer Annexure B). The pace of growth of food products and beverages slowed to 3.7% in December 2012 from 5.7% in November 2012.

Table 4: Contribution to the Manufacturing Sector by Sub-Sectors Sub-Sectors Weight Growth

in Dec 2012

Contribution to Manuf.

Growth Electrical Machinery & Apparatus 2.0 48.2% 1.8% Basic Metals 11.3 6.2% 0.9% Coke, Refined Petroleum Products & Nuclear Fuel

6.7 9.3% 0.5%

Furniture; Manufacturing N.E.C. 3.0 18.8% 0.4% Food Products & Beverages 7.3 3.7% 0.4%

Others Displaying Expansion 11.1 3.6% 0.4%

Others Displaying Contraction 34.1 -10.8% -5.1%

Manufacturing 75.53 -0.7% -0.7%

Source: CSO, ICRA Analysis

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Mining & Quarrying: This sub-sector displayed a 4.0% contraction in December 2012, a slight improvement relative to the 5.5% de-growth in November 2012. The Index of Core Industries released by the Office of the Economic Advisor, Government of India indicates that the pace of growth of crude oil improved marginally to 1.0% in December 2012 from 0.7% in November 2012. Moreover, the de-growth of coal production eased to 0.2% in December 2012 from 4.4% in November 2012 (refer Table 5). The pace of de-growth of natural gas remained around 15% in the past four months. In addition, closure of one of Nalco’s bauxite mines in Odisha from mid-November 2012 to mid-December 2012 (following the expiry of its 30-year lease) contributed towards the weak mining performance in December 2012. Mining & quarrying output contracted by 3.2% in Q3FY12, for the sixth consecutive quarter, and by 1.9% in April-December 2012, as compared to the 2.6% de-growth in April-December 2011. The growth performance of mining & quarrying in the first nine months of FY13 was inferior to the other sectors of the IIP. Electricity: Electricity generation expanded by 5.2% in December 2012, an improvement relative to the 2.4% growth in November 2012. Data released by the CEA indicates that the pace of growth of thermal electricity generation improved to 7.3% in December 2012 from 5.6% in November 2012 in y-o-y terms. Additionally, the pace of de-growth of hydro electricity generation in y-o-y terms eased substantially to 10.8% in December 2012 from 20.3% in November 2012. This reflects the base effect (with a de-growth of 0.3% in December 2011 relative to a 14.6% expansion in November 2011) even as the deficit in post-monsoon rainfall worsened slightly to 21% below the long period average (LPA) as on December 31, 2012 from 19% as on November 28, 2012. Electricity generation expanded by a modest 4.6% in April-December 2012, considerably lower than the 9.4% growth recorded in the same months of 2011-12. Nevertheless, this remains the fastest growing sector of the IIP so far in FY13.

Table 5: Growth of Coal, Crude Oil and Natural Gas Coal Crude Oil Natural Gas Weight 4.379 5.216 1.708 Oct 2011 -8.8% -0.9% -7.4% Nov 2011 4.9% -5.6% -10.1% Dec 2011 5.5% -5.6% -10.8% Oct 2012 11.0% -0.4% -14.9% Nov 2012 -4.4% 0.7% -15.2% Dec 2012 -0.2% 1.0% -14.9%

Source: Index of Eight Core Industries, Ministry of Commerce and Industry, Office of the Economic Advisor; ICRA Analysis Chart 3: Contribution to IIP Growth in December 2012

Source: CSO; ICRA Analysis

Mining, -0.4%

Basic, 1.0%

Manufacturing, -0.5%

Capital, -0.1%

Electricity, 0.4%

Intermediate, -0.0%

Durables, -1.1%

Non Durables, -0.3%

-2%

-1%

0%

1%

2%

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USE-BASED CLASSIFICATION Basic Goods: The pace of growth of basic goods improved marginally to 2.6% in December 2012 from a revised 1.5% in November 2012 (refer Chart 4). The pace of growth of electricity, coal and cement improved in December 2012 as compared to the previous month as indicated by the Index of Core Industries (refer Annexure C). However, fertilisers displayed a contraction of 3.9% in December 2012 as compared to the moderate 5.0% growth in November 2012. Additionally, data released by CSO indicates that ‘molasses’, ‘carbon steel’ and ‘CR sheets’ displayed an expansion in y-o-y terms in December 2012 even as ‘stampings & forgings’ recorded a 35% contraction in the same month (refer Annexure B). Reflecting the base effect, growth of basic goods improved slightly to 2.7% in Q3FY13 (4.4% in Q3FY12) from 2.2% in Q2FY13 (7.0% in Q2FY12). Nevertheless, basic goods have displayed a sluggish 2.7% growth in April-December 2012 as compared to the moderate 6.3% in the same months in 2011. Capital Goods: In line with our expectations, the de-growth of capital goods output eased to 0.9% in December 2012 from 8.5% in November 2012, reflecting the base effect (refer Chart 5 and Annexure A). Items such as ‘tractors’, ‘commercial vehicles’ and ‘boilers’, with a combined weight of 3.26% in the IIP Index, displayed a substantial contraction in December 2012. However, items such as ‘aluminium conductors’ and ‘cable, rubber insulated’ displayed a sharp expansion in December 2012 (refer Annexure B). The de-growth in capital goods has eased from 20% in Q1FY13 to 8% in Q2FY13 and further to 1% Q3FY13 in y-o-y terms. Nevertheless, this is the only sub-index that contracted during the just-concluded quarter. With no signs of an uptick in investment activity, the growth of capital goods is expected to remain sluggish in the immediate term. As compared to the 2.9% contraction in April-December 2011, capital goods output has declined by 10.1% in the first nine months of 2012, by far the worst performance amongst the use-based categories. Intermediate Goods: Output of intermediate goods declined by 0.1% in y-o-y terms in December 2012, as compared to the revised 1.6% de-growth in November 2012. While ‘block board’, ‘fasteners’ and ‘furnace oil’ contracted in December 2012 in y-o-y terms, ‘petroleum coke’ and ‘liquefied petroleum gas’ displayed a substantial expansion in the same month (refer Annexure B).

Chart 4: Growth of Basic Goods

Source: CSO, ICRA Analysis Chart 5: Growth of Capital Goods

Source: CSO, ICRA Analysis

0%

2%

4%

6%

8%

10%

12%

2011-12 2012-13

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

2011-12 2012-13

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The growth of intermediate goods improved to 2.4% in Q3FY13 from 0.8% in Q1FY13 and 1.5% in Q2FY13. In line with these trends, intermediate goods expanded by 1.6% in the first nine months of 2012-13, as compared to the 0.7% de-growth in April-December 2011. Consumer Durables: The output of consumer durables declined by a sharp and unexpected 8.2% in December 2012 as compared to a 16.9% growth in October 2012 and a 1.3% expansion in November 2012 (refer Chart 6). In contrast to the trend of expansion in month-on-month terms in December in the previous three years, the consumer durables sub-index contracted by 9.3% in December 2012 as compared to November 2012. This may reflect a draw-down of inventory by producers in response to the persistent sluggishness in consumer demand. ‘Telephone instruments’ displayed a 21% de-growth in December 2012, the impact of which was partly offset by a 24% growth of ‘wood furniture’ (refer Annexure B). Benefiting from the high growth in October 2012, which partly reflected inventory build-up to meet festive season demand, the pace of growth of consumer durables revived to 3.2% in Q3FY13, after having declined from 8.0% in Q1FY13 to 0.1% in Q2FY13. Overall, consumer durables expanded by 3.7% in April-December 2012, weaker than the 5.1% growth in the first nine months of 2011-12. Nevertheless, this remains the best performance amongst the use-based categories. Consumer Non-Durables: This sub-index displayed a de-growth for the second consecutive month (1.6% in November 2012, 1.4% in December 2012), reflecting the base effect, with double-digit growth in the last two months of 2011 (refer Chart 7). In December 2012, the performance of this segment was dampened by the sharp de-growth of ‘newspapers’ and ‘razor blades’, whereas other items such as ‘gems & jewellery’ and ‘aerated water & soft drinks’ displayed a considerable expansion in the same month (refer Annexure B). The pace of growth of consumer non-durables worsened to 1.9% in Q3FY13 from 2.6% in Q2FY13. This partly reflects an adverse base effect, with growth having improved to 10.1% in Q3FY12 from 2.1% in Q2FY12. Overall, growth of consumer non-durables declined to 1.7% in April-December 2012 from a moderate 6.1% in the same months in 2011-12, highlighting the impact of continuing high food inflation on disposable income and discretionary consumer spending.

Chart 6: Growth of Consumer Durables

Source: CSO; ICRA Analysis Chart 7: Growth of Consumer Non-Durables

Source: CSO, ICRA Analysis

-10%

-5%

0%

5%

10%

15%

20%

2011-12 2012-13

-5%

0%

5%

10%

15%

20%

2011-12 2012-13

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ANNEXURE A: Chart 10: Year-on-Year Growth in Mining & Quarrying Chart 11: Year-on-Year Growth in Manufacturing

Source: CSO; ICRA Analysis Source: CSO; ICRA Analysis

Chart 12: Year-on-Year Growth in Electricity Chart 13: Year-on-Year Growth in Basic Goods

Source: CSO; ICRA Analysis Source: CSO; ICRA Analysis

-12%

-8%

-4%

0%

4%

8%

12%

-8%

-4%

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4%

8%

12%

16%

0%

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12%

16%

0%

2%

4%

6%

8%

10%

12%

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Chart 14: Year-on-Year Growth in Capital Goods Chart 15: Year-on-Year Growth in Intermediate Goods

Source: CSO; ICRA Analysis Source: CSO; ICRA Analysis

Chart 16: Year-on-Year Growth in Consumer Durables Chart 17: Year-on-Year Growth in Consumer Non-Durables

Source: CSO; ICRA Analysis Source: CSO; ICRA Analysis

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-12%

-8%

-4%

0%

4%

8%

12%

16%

-10%

-5%

0%

5%

10%

15%

20%

25%

-8%

-4%

0%

4%

8%

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16%

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ANNEXURE B:

Items Weight Growth in

Dec 2012 Manufacturing Sub-Sector Use-Based Classification

Cable, Rubber Insulated 0.12 133.6% Electrical Machinery & Apparatus N.E.C. Capital Goods Conductor, Aluminum 0.20 82.3% Electrical Machinery & Apparatus N.E.C. Capital Goods Commercial Vehicles 1.93 -19.8% Motor Vehicles, Trailers & Semi-Trailers Capital Goods Tractors 0.38 -21.0% Machinery & Equipment N.E.C. Capital Goods Plastic Machinery incl. Moulding Machinery 0.26 -22.3% Machinery & Equipment N.E.C Capital Goods Boilers 0.40 -24.5% Fabricated Metal Products, except Machinery & Equipment Capital Goods Grinding Wheels 0.29 -44.5% Other Non-Metallic Mineral Products Capital Goods

Molasses 0.11 33.5% Food Products & Beverages Basic Goods CR Sheets 0.56 23.9% Basic Metals Basic Goods Carbon Steel 0.78 23.7% Basic Metals Basic Goods Stampings & Forgings 0.49 -34.8% Fabricated Metal Products, except Machinery & Equipment Basic Goods

Petroleum Coke 0.16 64.9% Coke, Refined Petroleum Products & Nuclear Fuel Intermediate Gas, Liquefied Petroleum 1.12 18.5% Coke, Refined Petroleum Products & Nuclear Fuel Intermediate Furnace Oil 0.39 -25.5% Coke, Refined Petroleum Products & Nuclear Fuel Intermediate Fasteners (excl. Zip Fasteners) 0.57 -29.9% Fabricated Metal Products, except Machinery & Equipment Intermediate

Block Board 0.51 -29.9% Wood & Products Of Wood & Cork Except Furniture; Articles of Straw & Plating Materials Intermediate

Wood Furniture 0.24 23.8% Furniture; Manufacturing N.E.C. Consumer Durables Telephone Instruments 0.22 -21.1% Radio, TV & Communication Equipment & Apparatus Consumer Durables

Aerated Water & Soft Drinks 0.25 65.0% Food Products & Beverages Consumer Non-Durables Gems & Jewellery 1.77 24.5% Furniture; Manufacturing N.E.C. Consumer Non-Durables Razor Blades/ Safety Blades 0.53 -23.5% Fabricated Metal Products, except Machinery & Equipment Consumer Non-Durables Newspapers 1.01 -24.8% Publishing, Printing & Reproduction of Recorded Media Consumer Non-Durables

Source: CSO; ICRA Analysis

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ANNEXURE C: Growth in Index of Core Industries

Source Index of Eight Core Industries, Ministry of Commerce and Industry, Office of the Economic Advisor; ICRA Analysis

Index of Core Industries

Coal Crude Oil Natural Gas Refinery Products

Fertilizers Steel Cement Electricity

Weight 37.9% 4.38% 5.2% 1.71% 5.94% 1.25% 6.68% 2.41% 10.32%

Month

Nov-11 7.8% 4.9% -5.6% -10.1% 11.2% -6.7% 10.5% 17.0% 14.4%

Dec-11 4.9% 5.5% -5.6% -10.8% 0.7% 0.8% 10.2% 13.6% 8.9%

Nov-12 1.6% -4.4% 0.8% -15.2% 6.6% 5.0% 6.0% -3.0% 2.4%

Dec-12 2.6% -0.2% 1.0% -14.9% 5.0% -3.8% 5.2% 3.9% 4.4%

April-Dec FY12

4.8% -2.7% 1.9% -8.8% 4.0% -0.5% 9.1% 5.8% 9.3%

April-Dec FY13

3.3% 5.7% -0.4% -13.3% 6.9% -3.4% 3.6% 6.1% 4.6%

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