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Economy
Industrial Production
August IIP: Clear signs of slowdown. The August outturn of IIP pointed to signs of
moderation in the economy with growth at 4.1% against consensus expectations of
4.7%. Intermediate goods and consumer durables have continued to see weak growth.
Seen in conjunction with other indicators like the manufacturing PMI and the trend in
excise duty collections, industrial production is clearly slowing. However, we do not
expect a hard landing of the economy as enablers from the fiscal side as also higher
rural incomes keep the domestic consumption momentum intact. July IIP growth was
revised to 3.8% from 3.3%.
Manufacturing sector grows at 4.5%; mining production contracts by 3.4%
In line with our expectations of a tepid growth in August, the manufacturing sector grew by 4.5%
on a yoy basis even as it contracted by 2.8% mom. In fact, on a sectoral basis all three sectors
(mining, manufacturing and electricity) fell from July levels. This is not entirely unexpected given
the monsoons in August (seasonal effect) and a general slowdown in the economy. At a 2-digit
level, sectors like ’basic metals‘ (11.2%), ’radio, TV and communication equipment & apparatus‘
(12.5%) and ’other transport equipment‘ (12.1%) showed strong growth while ’textiles‘ ((-)3.8%)
and ’machinery and equipment n.e.c.’ ((-)0.7%) have continued to be weak. Mining sector
contracted by 3.4% (contraction of 6% mom) after a growth of 1.5% in July. Electricity sector
came in at 9.5%, higher than 8.9% indicated in core sectors production release.
Signs of slowdown in economy showing in consumer durables and intermediate goods
From a use-based perspective the signs of slowdown are more evident. Consumer durables
production grew by 4.6% but more importantly it saw contraction of 9.6% on an mom basis.
Passenger cars production, which forms a significant part of this index, contracted by 9.3% in
August and 9.4% in September which is likely to negatively affect consumer durables index in
September too. Intermediate goods continued to remain muted at 1.3%, up from (-)0.5% in July.
Capital goods production came in at 3.9% while basic goods came in at 5.4%.
Growth slowdown is being indicated by other key variables
Along with the IIP being on a moderating path, other key leading indicators point towards a
slower growth. The manufacturing PMI has dipped close to the contraction zone of 50 (see Exhibit
1), while the services PMI is already below 50. Excise duty collections growth, which has historically
been closely correlated with industrial production, is also on a downward trend (see Exhibit 2). We
also expect that earnings growth for the BSE-30 companies (ex-energy) to be lower in 2QFY12E
compared to 1QFY12, indicative of the pressures faced by the companies (see Exhibit 3). Concerns
on the investment cycle due to high interest costs and low investor confidence (due to an almost
full policy paralysis from the government) is also likely to keep growth bias on the lower side.
A policy dilemma for the RBI – need to now choose between inflation and growth
Inflation is still expected to be high (September print likely at 9.86%). However, growth concerns
have now increased, also clearly evident in some of the lead indicators that we follow. On the
other hand, the momentary return to risk appetite notwithstanding, the overall concerns of a
global slowdown and European debt issues are unlikely to be resolved soon. Even as the RBI’s
stance of monetary policy might not change due to the high inflation levels, it may be ideal for the
RBI to pause now and assess the implications of the previous policy hikes, especially in an
atmosphere of heightened risks to global growth and thus a possible downward bias to energy
prices in the medium term. Thus, the RBI could lean towards a pause on October 25.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Industrial Production
August IIP: Clear signs of slowdown. The August outturn of IIP pointed to signs of
moderation in the economy with growth at 4.1% against consensus expectations of
4.7%. Intermediate goods and consumer durables have continued to see weak growth.
Seen in conjunction with other indicators like the manufacturing PMI and the trend in
excise duty collections, industrial production is clearly slowing. However, we do not
expect a hard landing of the economy as enablers from the fiscal side as also higher
rural incomes keep the domestic consumption momentum intact. July IIP growth was
revised to 3.8% from 3.3%.
Manufacturing sector grows at 4.5%; mining production contracts by 3.4%
In line with our expectations of a tepid growth in August, the manufacturing sector grew by 4.5%
on a yoy basis even as it contracted by 2.8% mom. In fact, on a sectoral basis all three sectors
(mining, manufacturing and electricity) fell from July levels. This is not entirely unexpected given
the monsoons in August (seasonal effect) and a general slowdown in the economy. At a 2-digit
level, sectors like ’basic metals‘ (11.2%), ’radio, TV and communication equipment & apparatus‘
(12.5%) and ’other transport equipment‘ (12.1%) showed strong growth while ’textiles‘ ((-)3.8%)
and ’machinery and equipment n.e.c.’ ((-)0.7%) have continued to be weak. Mining sector
contracted by 3.4% (contraction of 6% mom) after a growth of 1.5% in July. Electricity sector
came in at 9.5%, higher than 8.9% indicated in core sectors production release.
Signs of slowdown in economy showing in consumer durables and intermediate goods
From a use-based perspective the signs of slowdown are more evident. Consumer durables
production grew by 4.6% but more importantly it saw contraction of 9.6% on an mom basis.
Passenger cars production, which forms a significant part of this index, contracted by 9.3% in
August and 9.4% in September which is likely to negatively affect consumer durables index in
September too. Intermediate goods continued to remain muted at 1.3%, up from (-)0.5% in July.
Capital goods production came in at 3.9% while basic goods came in at 5.4%.
Growth slowdown is being indicated by other key variables
Along with the IIP being on a moderating path, other key leading indicators point towards a
slower growth. The manufacturing PMI has dipped close to the contraction zone of 50 (see Exhibit
1), while the services PMI is already below 50. Excise duty collections growth, which has historically
been closely correlated with industrial production, is also on a downward trend (see Exhibit 2). We
also expect that earnings growth for the BSE-30 companies (ex-energy) to be lower in 2QFY12E
compared to 1QFY12, indicative of the pressures faced by the companies (see Exhibit 3). Concerns
on the investment cycle due to high interest costs and low investor confidence (due to an almost
full policy paralysis from the government) is also likely to keep growth bias on the lower side.
A policy dilemma for the RBI – need to now choose between inflation and growth
Inflation is still expected to be high (September print likely at 9.86%). However, growth concerns
have now increased, also clearly evident in some of the lead indicators that we follow. On the
other hand, the momentary return to risk appetite notwithstanding, the overall concerns of a
global slowdown and European debt issues are unlikely to be resolved soon. Even as the RBI’s
stance of monetary policy might not change due to the high inflation levels, it may be ideal for the
RBI to pause now and assess the implications of the previous policy hikes, especially in an
atmosphere of heightened risks to global growth and thus a possible downward bias to energy
prices in the medium term. Thus, the RBI could lean towards a pause on October 25.
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