Capacity underutilisation behind weak IIP numbers: report

Excess inventory and capacity under-utilisation are the main reasons behind weak industrial output, says a report by credit ratings agency SMERA

Excess inventory in the system and capacity under-utilisation were the main reasons behind weak index of industrial production (IIP) numbers, a recent report by credit rating agency SMERA says.
 
The January 2016 IIP and Core Industry numbers are consistent with the trend experienced in the previous three months with all categories continuing to maintain status quo. Overall, industry output declined by 1.5%. The capital goods category has declined by 20.4% in January and recording virtually no change in April-January 2015-16 period as compared to the same time last year.
 
The study by SMERA, which specialises in ratings for small and medium enterprises, said “A decline in manufacturing by almost 3 per cent somewhat explains the irregularity as demand has not been driving capacity expansion. This is due to underutilisation and excess inventory in the system.”

 

Interestingly, the consumer durables category continues to show healthy numbers growing at 6% while the sector has registered growth of 12.6% during April-January 2015-16.
 
SMERA estimates that the CPI numbers will remain 4.8% this financial year. However, the comparative rise in inflation over the last three months is a sign of pent-up demand driving capacity utilisation and this will eventually lead to augmented capital expenditure in the coming months.
 
Study report said, “Incremental capacity created during the growth phase was not yielding anticipated returns and discouraged the private sector from investing.”
 
Moreover, the increase in corporate savings from 10.5% of gross domestic production (GDP) to nearly 13% is thought provoking in this regard as the private sector’s gross capital formation (GCF) contribution for the year is not yet clear, it added.

 
“However, positive signs are to be seen from the electricity, fertiliser and cement categories (as part of the Core Sectors) that give us a good sense about the near term (Q4 and onward) as these heavy weights will drive demand and bring about the necessary respite for the macro-economy,” the SMERA study said.