Capex Improves, Consumption Remains Weak :: Morgan Stanley

IP growth bottoming out: Industrial production (IP)
growth accelerated to 2.5% YoY in March vs. 0.5% in
February 2013 (revised downwards from 0.6%
earlier). This was in line with consensus expectations
as per a Bloomberg survey of growth of 2.4% YoY.
On an annual basis IP growth decelerated to 1% in
F2013 vs. 2.9% in F2012.
Capex improves, consumption remains weak: On
a 3MMA basis, IP growth accelerated to 1.8% YoY
during the three months ended Mar-13 compared to
0.8% in the three months ended Feb-13. On a
seasonally adjusted basis the IP index has increased
by 4.3% (on a non-annualized basis) from the trough
in Sep-12. Moreover, components of IP are showing
improvement in growth mix, with capital goods output
growth in a positive zone for the second consecutive
month. While consumer goods output has remained
weak, we believe this is a necessary adjustment to
improve the underlying growth mix and productivity
dynamic. Indeed real government spending less
interest and subsidy (adjusted for CPI), which is
essentially transfers to households, has declined by
6.5% YoY between Sep-Feb 2013. While in
sequential terms real government spending may
show some improvement from these low levels, we
expect it to remain weak in 1H F2014 and
consequently consumption spending growth will
remain slow.
Manufacturing sector is recovering but mining is
still a drag: In the manufacturing segment, output
growth accelerated to 3.2% compared to 1.9%YoY in
Feb. However, the details of manufacturing sub
segment growth raise some concern about the quality
of data. While the segment ‘wearing apparel’ with a
(weight of 2.8%) rose by 152% YoY and contributed
4.2% to IP growth, industry sub segment ‘publishing
printing and media’ (weight of 1.1%) declined by

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23.2% leading to a negative contribution of 2.5% to IP
growth.
On an annual basis, manufacturing output growth
decelerated to 1.2% in F2013 vs. 3% in F2012.
Electricity output growth accelerated to 3.5% YoY in Mar
vs. a decline of 3.2% in the previous month. On an
annual basis, electricity output growth decelerated to 4%
in F2013 vs. 8.2% in F2012. Mining output continued to
decline, registering a fall of 2.9%YoY in Mar vs. a fall of
7.6% in Feb. On an annual basis, mining output declined
by 2.4% in F2013 vs. a decline of 2% in F2012.
Consumption improved a bit, but still weak: As per
the use-based classification, consumer goods output
growth accelerated to 1.6%YoY in Mar compared to
0.4% in Feb. For full year F2013, consumer good growth
decelerated to 2.4% vs. 4.4% in F2012. Within consumer
goods, while growth for consumer non durables
accelerated, consumer durables output declined in Mar.
Consumer non durables output accelerated to 6.5% YoY
in Mar vs. 2.5% in Feb. Consumer durables output
declined by 4.5% YoY in Mar vs. a decline of 2.4% in
Feb.
Capex trend improving on low base effect: Capital
goods output growth remained relatively strong at 6.9%
YoY in Mar vs. 8.7% YoY in Feb. However this was partly
due to the low base of last year, when capital goods
output declined by 20%. This is the second consecutive
month where capital goods output has shown positive
growth (capital goods output has been declining since
Sep-11, barring two months of positive growth in Feb
and Oct 2012). IP ex-capital goods accelerated to 1.7%
YoY in Mar vs. a decline of 0.8% in Feb. On a full-year
basis, capital goods output declined by 6.3% in F2013
vs. a decline of 4% in F2012. Basic goods output growth
accelerated to 2.6%YoY in Mar compared with a decline
of 1.8% in Feb. Intermediate goods output declined by
0.2% YoY in Mar vs. a decline of 1% in the previous
month.
IP growth to remain steady in Apr: We expect IP
growth for Apr (to be released on June 12) to remain
steady at similar levels.
Bottom Line:We believe this will be a challenging cycle
and recovery in growth will be gradual. Moreover, we
believe that the starting point of the macro stability
environment (inflation, current account deficit and high
banking sector loan deposit ratio) will still constrain
domestic demand from staging a strong recovery. In this
context, we believe that exports and capex will play an
important role in the recovery. We expect sustainable
improvement in export growth in 2H 2013, which we
believe will help to aid growth in trade services,
manufacturing and capex spending. We continue to
focus on government policy reforms to improve the
productivity dynamic to assess the macro economic
outlook. We expect the government to continue to take
policy measures to slowly improve productivity growth
and growth mix. The initial phase of recovery will be
driven by an improvement in productivity growth rather
than a big rise in investment to GDP.