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• Industrial output up 8.8% YoY
for June, but quarterly growth
for Apr-Jun was weaker than
for Jan-Mar 2011
• Capital goods rebounded, but
the rest of industry was weak
• Rising real interest rates will
remain a drag; but exports
remain a pillar of strength
Summary
Industrial output was stronger in
June, as exports soared. However,
domestic demand is likely to stay
sluggish as real interest rates rise.
Fundamentals
India’s industrial output accelerated
to 8.8% YoY growth for June (from
5.9% YoY for May). Manufacturing,
which accounts for more than 75%
of the Index of Industrial Production,
surged to 10% YoY growth for June
from 6.1% YoY for May. Industrial
output for the first quarter of
FY2011/12 expanded by 6.8% YoY
(decelerating from the 7.9% YoY
pace for 4Q FY2010/11), with
manufacturing output increasing by
7.5% YoY (versus 8.7% YoY for 4Q
FY 2010/11).
The cyclicality of industrial output
over the past decade has been driven
primarily by capital goods –
representing the ups and downs of
fixed-investment spending.
Production of capital goods increased
by 37.7% YoY for June (versus 6.1%
YoY for May), ending a half-year of
sluggishness. In contrast, consumergoods
production stayed subdued,
expanding by just 1.6% YoY for June
and 4.1% YoY for the quarter, with
durables slowing to 1.0% YoY for June.
Intermediate-goods production rose
by just 1.8% YoY for June and 2.2%
YoY for the quarter.
Basic-metals production (17.7% YoY
for June), fuel-related production
(4.2% YoY) and vehicle-related
production (14.5% YoY) remain
strong performers within
manufacturing. In contrast, textile
production and chemicals-related
production contracted by 4.3% YoY
and 1.0% YoY in June respectively.
India’s remarkable export
performance continues, with exports
provisionally reported to have risen
by 82% YoY for July (after 45% YoY
growth for January-June 2011). One
consequence of the integration of
the India economy with the rest of
the world (and its improved
competitiveness) is that exports
strengthen when domestic demand
weakens. This inverse correlation is
demonstrated for motor vehicles
(right chart), especially since 2005,
but is increasingly true for the
economy as a whole.
Rising real interest rates will
dampen domestic demand further in
the current quarter. With headline
food (especially vegetable) inflation
rising further, and energy prices
rising too, we continue to expect a
further interest-rate hike next
month. Exports (especially to non-
Asia emerging economies, which
take a third of India’s exports)
should remain robust. However, we
expect industrial growth to
moderate further, as domestic
demand continues to be constrained
by rising real interest rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
• Industrial output up 8.8% YoY
for June, but quarterly growth
for Apr-Jun was weaker than
for Jan-Mar 2011
• Capital goods rebounded, but
the rest of industry was weak
• Rising real interest rates will
remain a drag; but exports
remain a pillar of strength
Summary
Industrial output was stronger in
June, as exports soared. However,
domestic demand is likely to stay
sluggish as real interest rates rise.
Fundamentals
India’s industrial output accelerated
to 8.8% YoY growth for June (from
5.9% YoY for May). Manufacturing,
which accounts for more than 75%
of the Index of Industrial Production,
surged to 10% YoY growth for June
from 6.1% YoY for May. Industrial
output for the first quarter of
FY2011/12 expanded by 6.8% YoY
(decelerating from the 7.9% YoY
pace for 4Q FY2010/11), with
manufacturing output increasing by
7.5% YoY (versus 8.7% YoY for 4Q
FY 2010/11).
The cyclicality of industrial output
over the past decade has been driven
primarily by capital goods –
representing the ups and downs of
fixed-investment spending.
Production of capital goods increased
by 37.7% YoY for June (versus 6.1%
YoY for May), ending a half-year of
sluggishness. In contrast, consumergoods
production stayed subdued,
expanding by just 1.6% YoY for June
and 4.1% YoY for the quarter, with
durables slowing to 1.0% YoY for June.
Intermediate-goods production rose
by just 1.8% YoY for June and 2.2%
YoY for the quarter.
Basic-metals production (17.7% YoY
for June), fuel-related production
(4.2% YoY) and vehicle-related
production (14.5% YoY) remain
strong performers within
manufacturing. In contrast, textile
production and chemicals-related
production contracted by 4.3% YoY
and 1.0% YoY in June respectively.
India’s remarkable export
performance continues, with exports
provisionally reported to have risen
by 82% YoY for July (after 45% YoY
growth for January-June 2011). One
consequence of the integration of
the India economy with the rest of
the world (and its improved
competitiveness) is that exports
strengthen when domestic demand
weakens. This inverse correlation is
demonstrated for motor vehicles
(right chart), especially since 2005,
but is increasingly true for the
economy as a whole.
Rising real interest rates will
dampen domestic demand further in
the current quarter. With headline
food (especially vegetable) inflation
rising further, and energy prices
rising too, we continue to expect a
further interest-rate hike next
month. Exports (especially to non-
Asia emerging economies, which
take a third of India’s exports)
should remain robust. However, we
expect industrial growth to
moderate further, as domestic
demand continues to be constrained
by rising real interest rates.
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