Anand Rathi: Economy – Industrial production Overt optimism gives way to pessimism

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Economy – Industrial production
Overt optimism gives way to pessimism
Although disappointing, the sharp reduction in industrial growth in
Nov ’10 was neither completely unexpected nor a reason for major
concern. The subdued growth was mainly due to inventory
readjustment, holiday season and base effect. A negative industrial
growth in Dec ’10 seems to be on the cards. We maintain FY11e IIP
growth at 7.1%.

 IIP growth falters. The index of industrial production (IIP) grew
2.7% in Nov ’10, below our (4.3%) and consensus (6.6%) expectations.
During Apr-Nov ’10, IIP grew 9.5% compared with 7.4% growth
during the same period last year.
 Manufacturing turns a major drag. Though growth in both Mining
(6%) and Electricity (4.6%) in Nov ’10 remained largely in line with the
performance during the recent months, tepid growth in the
Manufacturing sector (2.3%) pushed overall IIP growth down to its
lowest in 20 months. Only nine of the 17 categories within the
Manufacturing sector registered yoy growth in Nov ’10 compared with
15 categories in Oct ’10.
 Deepest fall in Consumer goods since FY1998. Production of
consumer goods in Nov ’10 has seen the biggest decline since May
1997. While consumer durables (weight: 5.4%) has seen steady growth
since Apr ’09, growth in consumer non-durables (weight: 23.3%)
remained subdued in the past 2.5 years. High inflation seems to be one
of the key reasons for the poor performance by the segment.
 Assessment of industry performance. The subdued industrial
growth in Nov ’10 could be attributed to three major factors: i) in the
run-up to the festive season in Nov ’10, there was inventory restocking
in Oct ’10 that could not be sustained in Nov ’10; ii) due to the fall of
festivals in Nov ’10, there was a 2-3 work-day loss in the month which
reduced production; and iii) while the IIP index has remained largely
flat since Apr ’10, base effect due to large fluctuations in the index
during FY10 is leading to volatility in FY11 IIP growth, without any
marked change in industrial production. We expect IIP growth to be
subdued in remaining FY11, with a possible yoy contraction in Dec
’10. Overt optimism on 1HFY11 growth is giving way to pessimism.
 Policy outlook. The RBI seems to be in a tough situation, before the
Jan ’11 monetary policy. There are various grounds for a rate hike (e.g.,
accelerating inflation and strong GDP growth) and also for
maintaining a pause (e.g., liquidity shortage and falling industrial/core
sector growth). However, if RBI’s recent track record is any indicator,
inflationary concerns are likely to give way to growth concerns leading
to a 25bps hike in both repo and reverse repo rates, with a possible
accompaniment by liquidity enhancing measures.