ICRA expects mute growth in consumer goods segment

ICRA has come out with its report on "IIP rises by a marginal 0.1% as monsoon-related concerns impact consumer goods while investment remains sluggish". The research firm, expects that rural consumer sentiments remained weak, resulting in a muted pace of growth of consumer goods in August 2012.

The Index of Industrial Production (IIP) rose by 0.1% in July 2012 relative to the 3.7% growth recorded in July 2011, reflecting a broad-based weakness in the industrial sector. Capital goods and intermediate goods contracted by 5.0% and 1.1%, respectively, in July 2012. Moreover, basic goods (1.5% in July 2012; 10.0% in July 2011) and consumer durables (1.4% in July 2012; 9.0% in July 2011) expanded at a subdued pace in July 2012, although this partly reflected an adverse base effect. In addition, consumer non-durables displayed a marginal 0.1% rise in July 2012 relative to the modest 4.1% growth in July 2011. Overall, it is likely that concerns regarding the rainfall deficit prevailing during the first half of the monsoon season and the resultant uncertainty in the outlook for consumer demand prompted a cut-back in production levels in some consumer goods sectors.

Despite the easing of the base effect related to a slowdown in growth from 9.5% in June 2011 to 3.7% in July 2011, we had expected industrial production to remain weak (~0.3%) in July 2012, and display a mild improvement as compared to the 1.8% contraction in June 2012. In line with our expectations, the contraction of capital goods output moderated to 5.0% in July 2012 (de-growth of 13.7% in July 2012) from 28.1% in June 2012 (growth of 38.7% in June 2011). Nevertheless, the continuing de-growth of capital goods in spite of the easing base effect highlights the extent of the slowdown in investment activity.

In terms of the sectoral classification, IIP growth was led by the 2.8% expansion of electricity generation in July 2012. However, channelling of power for irrigation to offset the impact of the unfavourable monsoon rainfall and systemic power outages on certain days contributed towards the 0.2% de-growth of manufacturing in July 2012. The number of sub-sectors of the manufacturing sector undergoing a contraction rose to 14 in July 2012 from 8 in June 2012. However, the pace of de-growth of the sub-sectors of the manufacturing sector undergoing contraction eased to 5.5% in July 2012 from 16% in June 2012. The mining & quarrying sector continued to dampen industrial growth, with a 0.7% contraction in July 2012 relative to the marginal 0.7% growth in July 2011.

OUTLOOK: A benign base effect is expected to contribute towards an improved growth of mining & quarrying in the coming months. However, the pace of growth is likely to remain moderate given various regulatory issues as well as the recent restrictions placed upon mining in the State of Goa. The de-growth of hydroelectricity generation may narrow from August 2012 onwards given an improvement in the reservoir levels. Notwithstanding an easing of the monsoon deficit over the course of August 2012 (-19% on August 1, 2012; -12% on August 29, 2012), concerns had persisted regarding the possibility of El Nino activity dampening the extent of rainfall in September 2012. In line with these concerns, we expect that rural consumer sentiments remained weak, resulting in a muted pace of growth of consumer goods in August 2012. For instance, the production of two-wheelers contracted in August 2012 as per data released by the Society of Indian Automobile Manufacturers (SIAM). However, the ensuing pickup in rainfall in late August and September 2012 is likely to bolster consumption demand to some extent in the following months. With investment activity remaining sluggish, capital goods are expected to display a de-growth in August 2012. Overall, the IIP Index is expected to report a subdued growth in August 2012 relative to the 3.4% growth in August 2011.