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India: Industrial growth picks up, led
by capital goods
Event
�� India announced industrial production (IP) data for June.
Impact
�� IP growth accelerated to 8.8% YoY in June, above market expectations
(consensus as per Bloomberg survey was 5.5%YoY). Notably, growth in May IP
was revised up to 5.9% YoY from 5.6% YoY reported earlier. (More details on
page 2).
Outlook
�� Growth to soft land over the coming quarters: We expect IP growth to
average 6-7% YoY in FY12 compared to the 8.3% YoY average growth
registered in FY11. Various indicators including auto sales, credit growth,
manufacturing PMI are indicating signs of moderation in the growth trend. In
addition, investments have slowed over the last few months owing to a higher
cost of capital, higher inflation and low investor confidence in lieu of graftrelated
investigations. While export data for July was quite strong (up 82% YoY)
we expect export growth to moderate in the coming months in view of the global
growth uncertainty. Overall, we expect India’s GDP growth to slow in the
coming quarters. While relatively, the policy tone towards reforms has been
encouraging, a uniform approach to remove the supply-side bottlenecks and
kick-start the investment cycle seems lacking.
�� RBI needs to “wait and watch”; global commodity prices are the key: We
expect WPI inflation to peak over the next 2-3 months. Considering that oil and
other global commodity prices have come off over the last few days in the
context of US debt downgrade and evolving debt issues in Europe, this will help
to contain inflationary pressures. The key is whether the RBI will hike policy
rates in the next mid-quarter review of monetary policy on Sept 16. We think the
RBI has some time before the next policy review to monitor the global
developments and the sustainability of commodity prices to trend lower. We
were expecting another 50bps hike in policy rates in the rest of 2011. However,
as of now, the probability of a rate hike in the September meeting has reduced.
�� Fiscal policy consolidation is critical: As we have been highlighting, fiscal
policy reversal is the key to control inflation in India. Also with the debt
downgrade concerns looming large, the S&P has recently hinted that the fiscal
capacities of some of the Asia Pacific countries including India “have shrunk
relative to pre-2008 levels”. It also mentioned that “The implications for
sovereign creditworthiness in Asia-Pacific would likely be more negative than
previously experienced, and a larger number of negative rating actions would
follow.” Even as we believe that the government is on the right path of fiscal
consolidation, the central government deficit (including off-budget oil subsidy
and revenue loss on elimination/reduction of customs/excise duty on petroleum
products) will still be expansionary at 5.8% of GDP in FY12 as per our
estimates compared to 6% of GDP (excluding telecom licence and BWA
collection) in FY11. The softening in global commodity prices will help reduce
some concerns on high oil subsidy. We believe that the government needs to
stick to its commitment of fiscal consolidation and curtail expenditure growth to
create room for private investments.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Industrial growth picks up, led
by capital goods
Event
�� India announced industrial production (IP) data for June.
Impact
�� IP growth accelerated to 8.8% YoY in June, above market expectations
(consensus as per Bloomberg survey was 5.5%YoY). Notably, growth in May IP
was revised up to 5.9% YoY from 5.6% YoY reported earlier. (More details on
page 2).
Outlook
�� Growth to soft land over the coming quarters: We expect IP growth to
average 6-7% YoY in FY12 compared to the 8.3% YoY average growth
registered in FY11. Various indicators including auto sales, credit growth,
manufacturing PMI are indicating signs of moderation in the growth trend. In
addition, investments have slowed over the last few months owing to a higher
cost of capital, higher inflation and low investor confidence in lieu of graftrelated
investigations. While export data for July was quite strong (up 82% YoY)
we expect export growth to moderate in the coming months in view of the global
growth uncertainty. Overall, we expect India’s GDP growth to slow in the
coming quarters. While relatively, the policy tone towards reforms has been
encouraging, a uniform approach to remove the supply-side bottlenecks and
kick-start the investment cycle seems lacking.
�� RBI needs to “wait and watch”; global commodity prices are the key: We
expect WPI inflation to peak over the next 2-3 months. Considering that oil and
other global commodity prices have come off over the last few days in the
context of US debt downgrade and evolving debt issues in Europe, this will help
to contain inflationary pressures. The key is whether the RBI will hike policy
rates in the next mid-quarter review of monetary policy on Sept 16. We think the
RBI has some time before the next policy review to monitor the global
developments and the sustainability of commodity prices to trend lower. We
were expecting another 50bps hike in policy rates in the rest of 2011. However,
as of now, the probability of a rate hike in the September meeting has reduced.
�� Fiscal policy consolidation is critical: As we have been highlighting, fiscal
policy reversal is the key to control inflation in India. Also with the debt
downgrade concerns looming large, the S&P has recently hinted that the fiscal
capacities of some of the Asia Pacific countries including India “have shrunk
relative to pre-2008 levels”. It also mentioned that “The implications for
sovereign creditworthiness in Asia-Pacific would likely be more negative than
previously experienced, and a larger number of negative rating actions would
follow.” Even as we believe that the government is on the right path of fiscal
consolidation, the central government deficit (including off-budget oil subsidy
and revenue loss on elimination/reduction of customs/excise duty on petroleum
products) will still be expansionary at 5.8% of GDP in FY12 as per our
estimates compared to 6% of GDP (excluding telecom licence and BWA
collection) in FY11. The softening in global commodity prices will help reduce
some concerns on high oil subsidy. We believe that the government needs to
stick to its commitment of fiscal consolidation and curtail expenditure growth to
create room for private investments.
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