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Second consecutive month of sluggish growth: September 2010
IIP growth, at 4.4% YoY, was significantly below our estimate of 6.7%
YoY and the consensus figure of 6.4% YoY. Notwithstanding the upward
revision to August IIP growth (from 5.3% to 6.9%), this is the second
consecutive month of sluggish growth in industrial production, and
raises concerns on the industrial upturn. YTD, industrial production
growth is now lower than full-year FY10 growth (10.2% vs. 10.5%).
Floods, delayed withdrawal of monsoons a drag: Widespread flooding
in September in northern India and delayed withdrawal of the monsoon this
year would have decelerated IIP growth, but the extent was surprising.
Sequentially, IIP was almost flat MoM in September 2010, as against the
~5% YoY growth in September in the previous two years.
Capital, basic, consumer goods the drag: Capital-goods output
declined for the second consecutive quarter (it declined 4% YoY in
September, following a 15% YoY decline in August). Consequently,
growth in capital goods output decelerated sharply to 11% during
2QFY11, from 30% in 1QFY11. Growth in basic goods output
decelerated to 4.1% during 2Q from 6.8% in 1Q. Growth in consumer
goods output similarly decelerated 2pps to 7% during 2QFY11, from
9.2% in 1QFY11.
Other growth indicators suggest robust domestic demand: Other
indicators of growth—auto sales, FMCG volume growth, consumerdurable
sales, non-oil imports—all suggest robust demand in the
economy, and do not suggest any slackening in demand growth.
However, indicators leveraged to external demand—export traffic growth
and railway freight growth—indicate weakness in external demand.
Inflationary pressures likely to intensify, RBI likely to raise rates
in 2011: In our view, the recent sluggishness in IIP is a reflection of the
index’s composition, not a slowdown in the domestic demand
environment. As such, we see no immediate impact of the lower IIP
figures from a monetary policy perspective. Given the recent surge in
commodity prices, inflationary pressures are likely to intensify (if the
increase sustains), requiring further RBI tightening in 2011.
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