JP Morgan: India: IP expectedly falls further due to base effect; don’t hit the panic button yet

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India: IP expectedly falls further due to base effect; don’t hit the panic button yet   December IP falls to 1.6 % oya but largely on account of the high base from the previous year On a sequential basis, December IP shows relatively healthy growth (1.8 % m/m, sa), with most sub-categories registering positive sequential growth Industry activity has certainly slowed in the second half of 2010 but in a more gradual and measured manner than the November and December prints suggest With January inflation again set to print above 8%, moderating IP growth may not be entirely undesirable from an inflation management standpoint December IP falls to 1.6%oya on account of unfavourable base December IP fell to 1.6%oya, the lowest print in 20 months, but primarily on account of an unfavourable base from the previous year. IP had surged 18%oya in December 2009 and therefore, given the sharp increase in the index last December, today’s reading had been largely anticipated by the market (Consensus: 2.0 %). Consequently, there was no market reaction on account of the IP print. Given the high base effect, it is more meaningful to look at the sequential monthly momentum. Viewed from this perspective, December IP actually grew healthily (1.8 % m/m, sa) though, admittedly, part of this may have been payback for the plunge (-3.5 % m/m, sa) the previous month. Meanwhile, the November print was revised upwards from 2.7% oya to 3.6% oya mainly on account of upward revisions to basic goods and consumer non-durables. Healthy sequential momentum across most sub-categories, but could be payback for November plunge Importantly, the healthy sequential momentum observed in December was relatively broad-based across most sub-categories. Consumer durables overcame a disappointing November print (-9,1 % m/m, sa) to bounce back sharply in December (18.6 % oya, 16.8 % m/m, sa). There were concerns after the November print that the sharp rise in nominal interest rates in recent months may have begun to bite and impacted the remarkable run that consumer durables have had over the last two years. Those worries will likely be alleviated after today’s print. Consumer non-durables also grew healthily in sequential terms (4.7 % m/m, sa, -1.1 % oya) for a change, but this is most likely payback for a sharp retrenchment in November (-5.3 % m/m, sa). Intermediate goods showed a similar pattern. They rose robustly in December (6.6 % oya, 3.8 % m/m, sa) but it is not clear whether this is just payback from the previous month’s sharp fall (-4.6 % m/m, sa) or whether new momentum has been acquired. In contrast, capital goods disappointed again. This sub-category has exhibited sharp volatility over the last few months gyrating strongly on a month-to-month basis. Typically, a weak month has been followed by a strong rebound and vice versa. What this has suggested is that most capital goods production is still being driven by infrastructure – which is lumpy and volatile – instead of a pick-up in the non-infrastructure, private capex cycle. Given this pattern and the fact that capital goods had declined the previous month (-10.6 % m/m, sa) one expected a rebound of sorts. Instead, capital goods declined further (-1.9 % m/m, sa) although the magnitude was modest. This is another reminder that 2010 ended with no conviction or momentum in the private capex cycle. Activity slowing but in a more measured way Industrial production activity over the last few months has certainly been slowing, but not as sharply or dramatically as the November and December IP prints suggest. Instead, a three-month-moving average suggests that the deceleration in growth has been much more measured. This is not surprising. Much of the growth over the last several quarters has been boosted by the fiscal and monetary stimuli. With both these policy stimuli being gradually withdrawn, and no commensurate pick-up in the private investment cycle, it is inevitable that economic activity would slow in the second half. This is consistent with other high frequency indicators (e.g. non-oil imports) as well as implicit in the advance estimates released by the government which pegged FY11 growth at 8.6%oya, despite the economy growing at almost 9% in the first half of the year. A slowdown in industrial activity may not be entirely undesirable, however, from the stand point of quelling current inflationary pressures. With all the data in for primary articles and fuel for January, it is very unlikely that the Jan inflation will show any moderation from December’s 8.4%oya print. Given the stubbornness of the inflation print in recent months, a reduction in demand – as manifested through a moderating IP – may be just what the doctor ordered to bring inflation down to more acceptable levels.