18 Aug 2008 4:19 PM

CMIE believes IIP under-estimates growth

The deceleration in the growth of the manufacturing sector to 5.6 per cent in June 2008 quarter as depicted by the IIP figures is leading to fears of a slowdown in the industrial growth. However, we believe that the industrial growth is not appropriately captured by the IIP numbers and there is no real slowdown in the industrial activity.

Financial results of 1,800 listed manufacturing companies show that their aggregate net sales grew by 34.4 per cent in the June 2008 quarter. After deflating the sales growth by the appropriate WPI inflation numbers, we get a real growth of 23.3 per cent in the sales of the manufacturing sector. This is much higher than the 5.6 per cent growth in production depicted by the IIP numbers in the June 2008 quarter. Considering this wide difference between the growth numbers of real sales of the manufacturing sector and the IIP, we conclude that the current industrial growth depicted by the IIP numbers is grossly under-reported.

A sector-by-sector comparison shows that there is major discrepancy in the real sales growth and IIP growth figures of the food products, textiles, chemicals, basic metals & metal products, machinery and transport equipments. Beverages, tobacco & tobacco products is the only manufacturing sector, which shows a lower growth in real sales compared to the growth in IIP numbers. This could be because the presence of the unorganised segment is quite large in case of tobacco products and alcohol sectors.

The disparity between the IIP growth figures and the growth in real sales of the manufacturing sector is not limited to the June 2008 quarter. The IIP has been under-reporting the growth of the manufacturing sector for quite some time. A comparison since the June 2004 quarter indicates that the real growth in the sales of the manufacturing companies was higher till the December 2006 quarter. However, the trend reversed in the March 2007 quarter. And, the IIP growth substantially outperformed the real sales growth of the manufacturing sector during the three quarters ended September 2007.

The IIP could have failed to capture the brief patch of slowdown in the manufacturing sector growth because of the dated weights and lack of ability to capture the seasonality in production which exists in case of some industries. The IIP also could not capture the recovery in the demand for manufactured products from the December 2007 quarter. The real sales growth of the manufacturing sector reported an acceleration since the December 2007 quarter, while the IIP growth continued to report a deceleration in growth.

Sonal Bhatia
bsonal@cmie.com