JP Morgan India: IP plunges, but the sky isn’t falling

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India: IP plunges, but the sky isn’t falling

November IP growth declines sharply to 2.7 % oya even as October IP growth is revised up to 11.3 % oya With Diwali falling in different months in 2009 and 2010, however, a better gauge of IP is the October-November average Using this metric, average IP growth during the October-November period is 6.9 % oya With export growth picking up sharply over the last two months, the prospects for IP are less sobering than this month’s numbers suggest November IP plunges…. November IP growth plunged to 2.7 % oya (-4.4 % m/m, sa) significantly below market expectations (6.5 % oya), led by a sharp sequential decline in every use-based category. Meanwhile, October IP was revised upwards to 11.3 % oya (4.5 % m/m, sa) from the initial print of 10.8% released last month. Much of the volatility observed in IP growth in recent months has been because ebbs and flows have been driven primary by capital goods and consumer durables which, while accounting for less than 15 percent of the basket, have grown and fallen sharply on a sequential basis in recent months. November was no different. Consumer durables declined 9.9 % m/m, sa suggesting that lending rate increases may have finally begun to bite, though it may also have been a payback for a surge in durables in October in the run-up to Diwali (see below). Consumer non-durables have had a spectacularly unimpressive run over the last year and this sector continued to under-perform declining 6.8 % m/m, sa. Capital goods had risen sharply in October (20.8 % m/m, sa) and gave back some of those gains this month (-10.8 % m/m). This was not entirely unexpected since the private capex cycle did not gain much momentum in November. … but the sky isn’t falling Despite the sharp decline in November, the need to panic has not arisen just as yet for a variety of reasons: First, interpreting the sharp increase in October IP and the sharp decline in November IP is hazardous because of the seasonal effects of the annual festival of Diwali. Last year, Diwali fell in October while this year Diwali fell in November. Typically, the month before the Diwali witnesses a sharp ramp-up in production in preparation for a sharp surge in consumption around the festival. In contrast, production in the month of Diwali itself typically abates due to the large number of holidays (and correspondingly reduced work weeks) on account of the holiday. October IP numbers therefore likely benefited from the run-up to Diwali while November numbers likely suffered because Diwali fell in that month. It is therefore dangerous to over interpret the November plunge. An average across the two months seems a more appropriate barometer of the growth of industrial production. Second, technicalities apart, global woes seem to have bottomed out and the impact on India’s exports has been material. December was the second consecutive month that exports grew robustly on a sequential basis and with growth in the developed markers expected to pick-up over the coming year, prospects for the current export momentum to continue appear bright. This bodes well for IP growth in the coming months because a significant fraction of manufacturing output is exported and consequently there is now a well-established correlation between IP and exports. Finally, given the monthly volatility in IP, it is more meaningful to look at three month moving averages. Viewed from this perspective, there was an undeniable slowdown in IP growth over 2010, but a far more measured slowdown than today’s numbers suggests, This is not unexpected given that there has been no discernable pick-up in the non-infrastructure capex cycle, which is a critical prerequisite to sustaining the government-spending-led growth momentum witnessed in the first half of this fiscal. Furthermore, a moderation of industrial production may not be entirely undesirable from the perspective of helping moderate inflation.