JPMorgan: India: IP surprises sharply on the upside as capital goods rebound

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India: IP surprises sharply on the upside as capital goods rebound

March IP surprises sharply on the upside (7.3 % oya; consensus: 4 % ) as capital goods production rebounds strongly In contrast, consumer durables growth slows, possibly signifying that interest rate hikes may be beginning to bite in this sector More generally, however, tepid year-on-year IP growth rates in recent months are masking strong sequential momentum of IP (13.4 % q/q, annualized) likely driven by surging manufacturing exports With the domestic economy likely to slow in FY 12, and elevated crude prices continuing to pose a risk to global activity, one can legitimately ask, however, whether the current momentum can be sustained March IP surprises on the upside; exports likely driving recent momentum March IP surprised sharply on the upside printing at 7.3 % oya (4.6 % m/m, sa) significantly above market expectations (Consensus: 4 %). As we have repeatedly emphasized (see, for example, “India: IP continues to display strong sequential momentum in January,” MorganMarkets, March 2011), the relatively muted year-on-year IP growth rates over the last few months are primarily on account of the high base effect from last year (with IP growth surging in the first half of 2010). Sequential IP growth has actually been very strong, running at 9.8 % q/q, saar in February and 13.4 % q/q, saar in March post today’s numbers. Year-on-year growth rates typically take a while to reflect the sequential momentum, and the March print is the first sign that the catch-up process has begun. Technicalities apart, the strong sequential IP growth over the last few months is not particularly surprising in light of surging manufacturing exports. With an increasing majority of manufacturing output being exported (see, “India: more open than you think,” MorganMarkets, October 2010), IP growth over the last quarter likely reflects robust external demand and buoyant manufacturing export growth. With the domestic economy likely to slow in FY12 and elevated crude prices continuing to pose a risk to global growth, however, one can legitimately ask whether and for how long the current IP momentum could sustain. Capital goods rebound… After contracting for three successive months, growth of capital goods production finally bounced back sharply to 12.9 % oya (32.9 % m/m, sa) despite the high base from the previous March. Given the lumpiness of capital goods production, however, it is too early to say whether the March surge was merely a payback for the three previous month, or whether it is the first sign that infrastructure provision (or even the private capex cycle more generally) is showing some signs of a pick-up. ….but consumer durable growth abates In contrast, after a sustained robust performance over the last three months (averaging 22 % oya) consumer durable growth moderated to 12.3 % oya. With growth of domestic passenger vehicle sales also moderating in April, it is possible that these are signs that the rise in interest rates over the last few months have begun to bite and that monetary transmission is finally taking effect. Meanwhile, consumer non-durables continued their run of posting sub-par growth printing at 5.7 % oya. IP growth moderates in FY11 on lack of investment pick-up With March numbers in, IP growth in FY11 printed at 7.8 % compared to 10.5 % the year before. Even though surging exports propped up IP towards the end of the fiscal, the moderation in IP fundamentally reflects the fact that the private investment cycle did not take off in the last fiscal. This is best reflected in the fact that capital goods growth in FY11 moderated to 9.3 % oya from 20.9 % the year before. While the investment cycle was likely stymied by global uncertainty and the risk of a global double-dip in the first half of the year, domestic macro-stability concerns around stubbornly high inflation and the prospect of a hard landing likely affected the capex cycle over the last few months.