India: April IP delivers a housewarming gift to the new government
IP surged in April (+1.7% m/m, sa) on the back of a solid sequential advance in March (+ 0.8 % m/m, sa) to print at a 13-month high of 3.4% oya, significantly above expectations (Consensus: 1.9% oya, JP Morgan 1.1%). The only caveat to the good news is that all of the upward surprise to the print came from the notoriously lumpy and volatile capital goods sector which grew 16% month-on-month (seasonally-adjusted). Ex-capital goods, IP actually contracted 0.1% -- which is what we had penciled in for overall IP – to print at a more subdued 1.9% oya.
The capital goods surge is likely linked to yesterday’s news that May witnessed very strong engineering exports growth. In fact, the generally strong exports outturn in May created upside risks to our April IP forecast. Given how strongly IP and exports are correlated, to the extent that exports continue to perform well, IP will benefit as a result. But exports orders have ticked down the last two months, and given the volatility and lumpiness of capital goods production, a significant payback can be expected in May. But, for now, policymakers and markets should be relieved that 2Q industrial growth is off to a very solid start.
The other elements of IP were very much in line with expectations. April IP had grown solidly on the back of surging consumer non-durables which was unlikely to sustain. Expectedly, therefore, non-durables did suffer a significant payback, contracting 3.5% sequentially (m/m, sa) and 3.3% in year-on-year terms.
Conversely, and expectedly, durables had a better month, as had been expected from the May auto sales numbers, growing 1.6% sequentially (m/m, sa) -- the first sequential advance in 3 months. This was not enough, however, to generate a positive year-on-year print, with durables still contracting 7.6% oya.
Key to IP in the coming months will be exports and the strength of the monsoon. If the fading of export orders sustains and the MET is right about a sub-normal/deficient monsoon, which will drag down rural demand, the joy in the April IP may be short-lived. But if exports continue to flourish on the back of firming global demand and inflation continues to tick down -- creating purchasing power -- more such positive surprises may be in the offing.
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