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India Economics-------------------------------------------------------------------------------------------------
Indian industrial production (Dec): Bad, but believable?
● Indian industrial production disappointed again in December,
coming in at just 1.7%. This is not a million miles away from the
trough of early 2009, at the height of the global credit crisis, and
frankly, we find it hard to believe that output growth is quite as
weak as this in reality. Upward revisions are likely.
● A double-digit year-on-year decline in the production of capital
goods was the primary reason for the weak output release.
Meanwhile, consumer durables improved.
● We very much doubt that today’s number will dissuade the
Reserve Bank of India from hiking interest rates further. In our
view, the next 25 bp move will come at the 17 March meeting and
we continue to look for another 75 bp of increases in total.
● We reiterate our view that the rate tightening will have a
meaningful impact on GDP growth in 2011/12. It is the main
reason for our bottom-of-the-range 7.7% forecast.
This was another disappointing Indian industrial release,
although frankly, it is very hard to believe that the sector is
anywhere near as soft as the official numbers suggest. The 1.6%
year-on-year figure was down from a revised 3.6% (previously 2.7%)
in November and is the weakest outturn since March 2009. In fact, it is
not a million miles away from the low point of the industrial cycle in
early 2009, following the global credit crisis, when it reached 0.2%.
The difference, however, is that at that time export (values) were
falling 22%, while they were up 36% year-on-year in December 2010!
Another important difference is that India’s manufacturing PMI was a
robust 56.7 in December compared with 47.0 in February 2009 – see
Figure 2.
Our calculations suggest that in seasonally-adjusted month-onmonth
terms, industrial production rose around 1% in December.
That’s the good news. The bad news is that this followed a more than
2% fall in the previous month. We calculate that on a three month –on
-three month annualised basis, output growth was precisely zero,
which at least is better than the 1.2% decline in November!
The Reserve Bank of India is likely to continue to ignore the
apparent weakness in industrial production, raising rates another
25 bp in March. Two points are important here. First, the downturn in
the industrial sector doesn’t necessarily tell us anything about what is
happening in the rest of the economy. In fact, the correlation between
production growth and GDP ex-industrial production growth has been
slightly negative over the last ten years. Second, in our view, GDP is
well above trend, which in turn justifies interest rates that are well
above normal. The RBI helpfully indicated a couple of months ago that
it thought interest rates were, at that time, ‘around normal’.
We expect GDP growth to slow to an average of 7.7% in 2011/12.
We revised down our growth forecast in mid-November (see India:
Livin’ on a prayer? dated 19 November), arguing that the lagged
effects of a stronger oil price, appreciating real exchange rate and
higher interest rates would take their toll on activity in 2011/12, more
than offsetting the benefits of better US economic growth. Since then,
all three variables have risen further and, while the equity market has
also corrected sharply, it is not clear to us that the downside risks to
growth have been fully factored in yet.
The breakdown of December industrial production showed a
13.7% year-on-year fall in capital goods production. That is quite a
lot weaker than anything seen at the height of the global credit crisis
and is the softest number for at least fifteen years, although adverse
base effects were an important factor behind the weakness here.
Meanwhile, as expected, consumer durables production bounced
smartly in January, registering 18.5% year-on-year growth and
consumer non-durables production showed a second consecutive
decline (of 1.1%).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
India
India Economics-------------------------------------------------------------------------------------------------
Indian industrial production (Dec): Bad, but believable?
● Indian industrial production disappointed again in December,
coming in at just 1.7%. This is not a million miles away from the
trough of early 2009, at the height of the global credit crisis, and
frankly, we find it hard to believe that output growth is quite as
weak as this in reality. Upward revisions are likely.
● A double-digit year-on-year decline in the production of capital
goods was the primary reason for the weak output release.
Meanwhile, consumer durables improved.
● We very much doubt that today’s number will dissuade the
Reserve Bank of India from hiking interest rates further. In our
view, the next 25 bp move will come at the 17 March meeting and
we continue to look for another 75 bp of increases in total.
● We reiterate our view that the rate tightening will have a
meaningful impact on GDP growth in 2011/12. It is the main
reason for our bottom-of-the-range 7.7% forecast.
This was another disappointing Indian industrial release,
although frankly, it is very hard to believe that the sector is
anywhere near as soft as the official numbers suggest. The 1.6%
year-on-year figure was down from a revised 3.6% (previously 2.7%)
in November and is the weakest outturn since March 2009. In fact, it is
not a million miles away from the low point of the industrial cycle in
early 2009, following the global credit crisis, when it reached 0.2%.
The difference, however, is that at that time export (values) were
falling 22%, while they were up 36% year-on-year in December 2010!
Another important difference is that India’s manufacturing PMI was a
robust 56.7 in December compared with 47.0 in February 2009 – see
Figure 2.
Our calculations suggest that in seasonally-adjusted month-onmonth
terms, industrial production rose around 1% in December.
That’s the good news. The bad news is that this followed a more than
2% fall in the previous month. We calculate that on a three month –on
-three month annualised basis, output growth was precisely zero,
which at least is better than the 1.2% decline in November!
The Reserve Bank of India is likely to continue to ignore the
apparent weakness in industrial production, raising rates another
25 bp in March. Two points are important here. First, the downturn in
the industrial sector doesn’t necessarily tell us anything about what is
happening in the rest of the economy. In fact, the correlation between
production growth and GDP ex-industrial production growth has been
slightly negative over the last ten years. Second, in our view, GDP is
well above trend, which in turn justifies interest rates that are well
above normal. The RBI helpfully indicated a couple of months ago that
it thought interest rates were, at that time, ‘around normal’.
We expect GDP growth to slow to an average of 7.7% in 2011/12.
We revised down our growth forecast in mid-November (see India:
Livin’ on a prayer? dated 19 November), arguing that the lagged
effects of a stronger oil price, appreciating real exchange rate and
higher interest rates would take their toll on activity in 2011/12, more
than offsetting the benefits of better US economic growth. Since then,
all three variables have risen further and, while the equity market has
also corrected sharply, it is not clear to us that the downside risks to
growth have been fully factored in yet.
The breakdown of December industrial production showed a
13.7% year-on-year fall in capital goods production. That is quite a
lot weaker than anything seen at the height of the global credit crisis
and is the softest number for at least fifteen years, although adverse
base effects were an important factor behind the weakness here.
Meanwhile, as expected, consumer durables production bounced
smartly in January, registering 18.5% year-on-year growth and
consumer non-durables production showed a second consecutive
decline (of 1.1%).
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