India May industrial production: Capex cycle continues to slow::Goldman Sachs,

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India May industrial production: Capex cycle continues to slow
Asia-MAP score: -15 (3, -5)
3 out of 5 for relevance to GDP
-5 on a scale of -5 to +5 for surprise relative to consensus


The Industrial Production Index (IP) grew 5.6% yoy in May, below the revised 5.8% yoy (from 6.3% yoy)
growth in April. The IP reading was significantly lower than the Bloomberg consensus expectation and our
expectations of 8.5% yoy growth. Sequentially, IP declined by 1.7% mom, s.a. in May, compared to 2.7% mom
drop in April.
Today’s downward surprise in IP print was across the board. The Capital Goods Index declined by 6.2% mom,
s.a., after a 10.6% mom, s.a. fall in April. Sequentially, the Consumer Goods Index continued to have negative
growth for the third consecutive month, driven by both consumer durables and non-durables. Consumer durables
declined by 3.4% mom, s.a. whereas consumer non-durables fell by 1.1% s.a., mom in May. Moreover, the April
headline number is revised down by 50 bp due to a significant downward revision in the Capital Goods Index from
14.5% yoy to 7.3% yoy now.
The slowdown reflects weakness in investment demand which we believe was impacted primarily by
government policy and to a lesser extent by rising rates and commodity prices. Along with the considerable
slowdown in the investment cycle captured by the Capital Goods Index, consumer goods growth has also
moderated in the past couple of months. Other indicators such as the PMI and auto sales are also suggesting a
slowdown. The June manufacturing PMI fell to 55.3 from 57.5. Auto sales also remained weak with 14.6% yoy
growth in June from 15.6% yoy growth in May.
Our FY12 GDP growth forecast at 7.5% is predicated on a slowdown in investment demand. Further, we
continue to expect the investment cycle to bottom out by end-FY12 due to a pickup in government-led
infrastructure projects and an end to the rate hiking cycle by summer end (see India: Timing the bottom of the
investment cycle, Asia Economics Analyst 11/12, July 7, 2011).
We expect the Reserve Bank of India to continue with its anti-inflationary stance and hike policy rates by
25 bp in its July 26 meeting. The next important data release is WPI inflation for June on July 14, where we
expect the print to be 9.7% yoy