JPMorgan: India: IP and trade data emit conflicting growth signals as gold imports tick up

India: IP and trade data emit conflicting growth signals as gold imports tick up

Expectations that February IP would build on the long-awaited January gains and thereby signal some inflection of industrial activity were quashed with IP slumping badly in February (-1.9 % m/m, sa), significantly below market expectations (Actual: -1.9 % oya, JP Morgan – 0.3 %, Consensus + 1%) and thereby giving up all of the January gains. In particular, the gains accrued in consumer goods production in January were reversed in February with non-durables, in particular, having a devastating month. That said, it may be too early to completely write off industrial growth. For the second time in three months, non-oil, non-gold imports surged (+10.4 % m/m, sa) in March signaling that domestic demand may be picking up and could eventually translate into higher domestic production. For now, however, this dynamic along with the fact that gold imports rose to $2.7 bn in March – still not at threatening levels but at an 8-month high – meant that the March trade deficit widened to $10.5 bn from $8.1 bn in February. However, such levels of the monthly deficit are still not threatening and conform with our full year forecast of the CAD at 1.7% of GDP in FY14. IP: one step forward, one step back After months of weakness and disappointment, IP finally gained meaningfully in January on the back of increasing consumer goods production. It was thought that a second strong harvest would boost rural demand and help engineer some turnaround in the IP cycle. Unfortunately, February IP thwarted such hopes. IP slumped 1.9% m/m, sa giving up all the gains incurred in January (+2 % m/m, sa). Worryingly, the biggest payback was in the consumer non-durables sector – which should theoretically benefit the most from stronger rural demand. Instead, the sector sequentially contracted almost 7% (m/m, sa) more than offsetting the gains of the previous two months. This was compounded by the fact that consumer durables also retracted in February – albeit less acutely (-1.6% m/m, sa) – and capital good production, which has remained flat over the last three months, declined more than 4% sequentially in February, making for weakness across the board. Given the aforementioned dynamics, manufacturing predictably had a weak month (-2.1 % m/m, sa) on the production side. But what was disappointing, if not surprising, was the weakness in mining and electricity production. The latter has grown solidly for much of the last year and partially offset the manufacturing weakness. But it has now contracted sequentially for two successive months (Feb and March), reflecting the reduction in plant load factors as power production has slowed both on account of the general economic slowing and financial constraints on the balance sheets of state electricity boards. Trade deficit widens, but for the right reasons On the face of it, a widening trade deficit in March should add to the IP gloom. But there are important caveats. First, the trade deficit widened from an excessively low level ($8.1 bn) in February to a still-very-contained level of $10.5 bn. To put this in perspective, such a run-rate of the monthly trade deficit is consistent with an annual CAD of just over 1% of GDP. Second, the deficit widened for the “right reasons”. Non-oil, non-gold imports which have been very sluggish in recent months – reflecting weak demand impulses in India – surged for the second time in three months. On a 3m/3m, saar basis they are now growing at almost 20%. If this sustains, it would signal a firming up of domestic demand which would eventually be expected to translate into higher domestic production. To be sure, it was not all hunky-dory in the trade numbers. Exports surged to $29.5 bn in March from $25.6 bn in February. But, as we had previously pointed out, this is the typical end-of-year effect wherein exports increase at the end of the financial year. In fact, on a seasonally adjusted basis, they declined sequentially (-1.7% m/m, sa) for a second successive month. Furthermore, the anecdotal evidence that gold imports were increasing on the ground, finally showed up in the data. Gold imports in March printed at $2.7 bn – still not at alarming levels – but the highest since July 2013 when the import curbs were imposed. It suggests that latent demand for gold is not as weak as the numbers in recent months have suggested and – if and when the import curbs are eased – gold imports could tick up further. All told, however, these dynamics are consistent with the full-year CAD forecast of 1.7% of GDP – more than half its level from the previous year.

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