Poor performance of primary goods segment compensated by imports

Impact: Negative: (Primary goods, Intermediary goods)

Brief: Industrial production is on a positive roll for the last 14 months - including August, with the index recording 4.3% growth. Improvement in new order book in manufacturing segment indicates an upward momentum in overall industrial production. Basic goods on the other hand are performing below expectations. However, given a weak correlation between growth in finished and primary goods segments, impact on economic growth is muted. This is because the latter is easily substituted by imports.

Industrial production is on a positive roll for the last 14 months - including August, with the index recording 4.3% growth. However, poor show by mining and basic goods segment is undermining this performance - pushing down the pace to a three-month low. During the reference period, mining sector has contracted by (-) 0.4%. Considering the usage based perspective, basic and intermediate segments have expanded by only 2.6% and 2.3% respectively. Finished goods category, on the other hand, has registered a strong growth of 5.8%. Similarly, infrastructure and capital goods are also on the same trajectory with a 7.8% and 5% growth, respectively.

According to industrial survey of the RBI, there is a significant improvement in new order book in manufacturing sectors in Q1, FY18. Therefore, overall industrial production is expected to continue this momentum. We believe that the consumer, capital and construction goods will be the driver of the industrial production in coming months.

We are however concerned about the weak correlation between growth in finished and primary goods segment as the latter is easily substituted by imports. This is apparent from the trend in imports of basic metals, which has sharpened in the recent months. Domestic production of Pig-Iron, which is a major component of primary goods segment, has been witnessing a de-growth of (-) 38% in FY19 (YTD). At the same time, it is substituted by imports primarily from Australia and South Africa. It is noted that import of pig iron has double as it reached $408 million in FY19 (Apr-Aug) as against $182 million during the same period, the previous year. Therefore, a strong growth in steel industry is not driving the domestic iron ore mining. Import of minerals items have been growing at 22% during the reference period despite a hostile base (55% growth in the previous year YTD). We believe that a softening non-energy commodity prices in the global market would further escalate import quantum. The country's still underdeveloped logistic network is another factor contributing to this anomaly as coal sector has been witnessing a similar outcome.

Growth in Industrial Production by Economic Activity:

  IIP Mining Manu Core
FY15 4.02 -1.34 3.75 4.94
FY16 3.33 4.34 2.9 2.98
FY17 4.58 5.33 4.32 4.76
FY18 4.38 2.31 4.6 4.28
Mar-18 4.58 3.05 4.67 4.58
Apr-18 4.86 5.06 5.2 4.44
May-18 3.21 5.7 2.79 4.65
Jun-18 7.04 6.6 6.9 6.67
Jul-18 6.61 3.35 6.96 6.63
Aug-18 4.3 -0.43 4.59 4.16

Growth in Industrial Production by Usage:

  Primary Capital Intermediate Infra Consumer Durable Non-durable
FY15 3.74 -1.13 6.11 4.98 3.9 3.97 3.86
FY16 4.97 3 1.52 2.84 2.94 3.33 2.58
FY17 4.9 3.18 3.32 3.91 5.67 2.97 7.98
FY18 3.69 3.94 2.24 5.6 6.03 0.66 10.4
Mar-18 3.02 -5.72 2.31 8.92 8.86 4.06 12.7
Apr-18 3.09 13.05 1.59 7.51 5.75 4.26 7.04
May-18 5.66 7.62 0.89 4.89 0.37 4.32 -2.56
Jun-18 9.28 9.62 2.42 8.53 5.92 13.1 0.47
Jul-18 6.74 2.8 1 9.23 9.34 14.27 5.53
Aug-18 2.63 5.01 2.36 7.79 5.85 5.23 6.32

Source: MOSPI, Acuité Research

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