Overall Manufacturing Sector

India's industrial growth bandwagon continued to march ahead at a rapid pace in July, with Index of Industrial Production (IIP) growing at 13.8 per cent year-on-year (YoY) basis. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of July 2010 stand (base 1993-94=100) at 192.6, 360.1 and 244.1

respectively, with the corresponding growth rates of 9.7, 15 and 3.7 per cent as compared to July 2009.

Growth Momentum in IIP data (% YoY)

Source: CSO

In terms of industries, as many as twelve (12)out of the seventeen (17) industry groups (as per 2-digit NIC- 1987) have shown positive growth during the month of July 2010 as compared to the corresponding month of the previous year. The industry group 'Machinery and Equipment other than Transport Equipment' have shown the highest growth of 49.4%, followed by 31.1% in 'Other Manufacturing Industries' and 24.9% in 'Transport Equipment and Parts'. On the other hand, the industry group 'Wood and Wood Products; Furniture and Fixtures' have shown a negative growth of 9.4% followed by 2.1% in 'Beverages, Tobacco and related products'.

Although the use-based classification throws up a slightly mixed picture, the overall trend remains encouraging. Capital goods continues to remain volatile, as after plunging from a high of 70% YoY growth attained in April, to a relatively meagre 9.7% YoY in June, the sector has again rebounded to a spectacular 63% growth rate. Despite the high degree of volatility exhibited by the sector, it is notable that capital goods has grown at a rate of 27% or more for the seventh time in the last 8 months. Further, on cumulative (Apr-July) basis, the sector has registered growth of more than 26% as against a tepid 1.4% in the corresponding period last year. These readings paint a robust

outlook for investment demand in the Indian economy, which would emerge as a major stimulant for overall economic growth. Consumer durables meanwhile continued to march along at a very strong pace, growing at a rate of 20% or more for the 13th consecutive month in July. However, consumer non-durables continue to exhibit sluggish growth. The sector registered a modest 0.5% growth in July, growing slower than consumer durables for the 16th consecutive month. The recent up tick in weekly food prices does not augur well for the chances of a revival in consumer non- durables, as higher food prices would curb consumption demand in lower income strata.

Use based IIP growth rates

Source: CSO

Cost escalation abates the growth for overall textiles and clothing industries

A close look at the sub sectors does not show the encouraging picture or a broad-based improvement in growth rates for the overall T&C industries per se. Though the 'Cotton Textiles' production has increased by 12.1% in July 2010 over the same month of 2009, the 'Textile Products (including apparel)' which are basically the apparel production has shown de-growth of 0.7 % for this month. Notably this sub sector of T&C industries has fared well by showing 5.9 % during recessionary period of July 2009. Another important sector 'Wool, Silk and Man-made fibre textiles' has also shown a tepid 1.2% growth rate for July 2010, which had achieved 34% during the same month of 2009. 'Jute and Other fibre textiles' have plummeted on growth rates during 2009

because of unprecedented situations of floods in major jute growing regions and followed by worrying trade unions strikes, now has been able to manage some positive growth rates. This sector has observed 19.3% of growth for July 2010 which is a sharp turnaround in comparison to -28.1% of July 2009. But, here low base effect cannot be ignored.

Rebound in cotton textiles production since January 2010 has been more supported by cotton yarn demands in domestic as well as exports markets despite the surge in prices. However, there has been a moderation in cotton production in recent times after disouragement on cotton yarn exports and followed by a continuous high increments in raw cotton prices. In fact, cotton yarn prices are not as sharply rising as cotton lint prices. Consequently the margins of Indian spinners are shrinking. Same time, apparel producers are struggling to operate with high cost escalations into their fabrics as input raw material. Since November 2009, the recovery in US imports demand has bolstered the cotton textiles and clothing exports. But, these opportunities are getting away from Indian cotton clothing exporters due to intense competition on price front and price cuts by major competitors like China and Bangladesh. Already, apparel exports in many countries of European regions are showing de-growth during 2010. Thus, shrinkage in operating margins, low exports in major exports destination countries for apparels in particularly and limited scope to increase the supply of textile products in domestic market with increasing prices could bring the growth momentum of cotton textile production on halt.

T&C Production Growth in IIP Data (% YoY)

Source: CSO

Due to low production increments in 'Wool, Silk and Man-made fibre textiles' and the growth in apparel production the overall growth for the T&C industries has been low at 4.8% for July 2010 in comparison to 9.4% during the same month of 2009. Cumulative growth for overall T&C sector was 3.8% during Apr- July 2010, which is low in comparison to 4.5% of 2009. This shows the concern for the whole of this sector, when rest of manufacturing sectors are performing well.

Monthly T&C Production growth in IIP Data (% YoY)

Note: Brackets show weights in T&C

Source: Estimates from CSO data