Production of consumer durables declines to 7-yr low in Nov

At 21.5%, the index was at its lowest for the month, with key contributors to the decline being auto, gems and jewellery

The just-released Index of Industrial Production (IIP) for the month of November throws up an interesting statistic. Production of consumer durables, which includes everything from auto to auto ancillaries, appliances, electronics and gems & jewellery, declined to a seven-year low of 21.5%.

 

While 2013 has seen notable troughs in the production of consumer durables, with the index falling to 18.3% in May and 12.1%, 10.8% and 10.1% in October, September and June respectively, November is the first month where the index has breached the 20%-mark. 

 

Key contributors to the decline include auto, gems and jewellery and home appliances. Weightage-wise, these categories contribute 31.4%, 17.6% and 4.2% respectively to the consumer durables index.

 

Aditi Nayar, senior economist at credit rating agency ICRA says that the post-harvest (that is, October-November period) uptick in demand has been weaker than expected. "Plus there was a shadow effect of the situation prevailing in gems and jewellery. Activity there has been quite low due to the sharp drop in gold imports, the basic raw material for gems & jewellery. Demand in the auto and appliances industries, meanwhile, has been weak for a while now," Nayar adds.

 

Passenger car sales, for the record, fell for the first time in 11 years in 2013 as customers continued to defer purchases amid a slowdown.

 

Siam data show passenger car sales fell 9.6% to 1,807,011 vehicles from 1,998,703 the previous year. A poor market has compelled companies to cut production of these 13 times over the past 18 months. November was no exception.

 

Similarly, home appliance sales (and therefore production) in 2013 has been sluggish on account of persistent price hikes due to the depreciation of the rupee against the dollar. According to industry estimates, price hikes in categories such as refrigerators, washing machines, air conditioners and microwave ovens through 2013 was to the tune of nine to 20%. Almost 70-75% of components going into these products is imported warranting price increases, manufacturers say. 

 

"I don't see the situation improving in 2014," says George Menezes, chief operating officer, Godrej Appliances. "Commodity inflation remains a challenge with a resurgence seen in Europe and the US. The rupee will continue to be weak against the greenback and with the new energy labeling norms kicking in at the start of the current calendar year, price hikes are inevitable," he adds. 

 

The new energy labeling norms by the Bureau of Energy Efficiency prescribes a two-step and one-step increase respectively in refrigerators and air conditioners. This means that a  five-star rated, frost-free refrigerator launched in 2013 becomes a three-star rated product in 2014, while a four-star rated split AC in 2013 becomes a three-star rated product this year. To retain the star rating of their products therefore, manufacturers say that price hikes to the tune of 6-7% will have to be taken to factor in the cost of production for the same. Companies such as LG, Samsung and Godrej are said to be contemplating price hikes, which is likely to be effected soon. 

 

In gems & jewellery, manufacturers continue to operate at half their capacity with the scenario unlikely to improve following recent statements by the finance ministry that it would not lift import curbs on gold this fiscal.

 

“The volume of imports is less likely to change till the 80:20 principle (20% to be exported against imports) exists. It has capped imports at 25 tonnes a month,” Sudheesh Nambiath, India analyst, GFMS Thomson Reuters, said. 

 

Gold imports for FY14 could be lower by 40% at 515 tonnes against 846 tonnes a year ago, experts say. This will be the lowest in 10 years.