India: IP surges, trade flows remain strong and tax collections buoyant allaying fears of a sharp slowdown ::JPMorgan,

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India: IP surges, trade flows remain strong and tax collections buoyant allaying fears of a sharp slowdown

June IP prints significantly above expectations as capital goods post a strong rebound Non-oil imports continue to remain buoyant in July and exports hold up well despite fears of weakening global activity Indirect tax collections continue to stay buoyant and above budgeted targets for the first 4 months of this fiscal year, as was the case through all of last year The pick-up in IP in conjunction with continued strength in non-oil imports and buoyant indirect tax collections suggests that fears of a very sharp slowdown are likely overstated and economic activity is stronger than is commonly anticipated Unless global commodity prices were to plunge or the next two inflation prints indicate a sharp and sustained moderation in inflation (which is unlikely), we expect the RBI to continue raising policy rates at its September review   June IP surprises sharply on the upside as capital good rebound strongly   June IP surprised sharply on the upside, printing at 8.8 % oya (2.6 % m/m, sa) significantly higher than consensus expectations of 5.5%oya. The surprise was driven by a sharp rebound in capital goods (37.7 % oya, 13.8 % m/m, sa) which had declined sequentially for the last two months. Given the lumpiness of capital goods production, some rebound had been expected, but the magnitude of the rebound was surprising given an increasingly widespread belief that the economy is slowing sharply and the investment momentum has abated even further in recent months.   At a broader level, however, the rebound in IP is not surprising given that manufacturing export growth has surged in recent months and non-oil import has picked up sharply suggesting the demand slowdown is being slightly overstated (see details below). Given that manufacturing exports constitute an increasing fraction of manufacturing output, the divergence between exports and IP was surprising over the last two months, suggesting that an inventory drawdown was likely at play. That phenomenon, however, seems to be over with IP rebounding as exports continue to surge and there are no tangible signs as yet that softening global demand has materially impacted India’s export sector.   Consumer durables slow further but it's not as bad as it looks Consumer durable growth continued to abate falling to 1% oya in June from 5.2% the previous month and almost 15% a few months ago. However, consumer durable weakness in June is overstated by the year-on-year numbers because these have been influenced by a very unfavourable base from last June when both consumer durables and non-durables surged. Sequentially, consumer durables stayed essentially flat (0.5 % m/m, sa) after moderating sharply the last two months. However, the fact the consumer durable growth has shown a secular deceleration over the last few months suggests that the monetary tightening over the last year has begun to bite. Non-oil import growth continues to remain buoyant and exports continue to hold up   As alluded to above, the strength of June IP is not surprising given that other indicators of the economy are also suggestive of stronger activity than is commonly thought of. Non-oil imports, for example, have surged in recent months and this momentum continued into July (37.1 % oya, 6.5 % m/m, sa). The sharp pick-up in non-oil imports over the last 3 months could undoubtedly be attributed, in part, to a substitution effect, with imports increasingly replacing domestic production given the high inflationary and cost pressures at home. However, the fact that IP rose strongly in June suggests that the substitution effect is only part of the story and this buoyancy also reflects stronger-than-expected final demand. While some of the increase in non-oil imports over the last few months is attributable to gold and silver imports, provisional data suggests that gold imports fell sequentially in July and therefore did not underpin the strength of non-oil imports in July.   Another empirical regularity over the last few months is that the perceived softening of global demand has not induced a moderation in buoyant export growth over the last few months. Exports had particularly surged in May and June suggesting that there would be some pay-back in July. However July exports held up surprisingly well (-0.6 % m/m, sa) inducing a sharp surge in the year-on-year rate on account of a favourable base from the previous year (81.8 % oya). Given that the PMI new export orders have fallen off sharply over the last few months, some moderation in sizzling export growth is eventually expected, but there is no evidence of that just as yet.   Indirect tax collections remain buoyant   Another indication that activity has not slowed as much as feared is that indirect tax collections continue to remain buoyant. For the first four months of this fiscal, preliminary estimates suggest that excise tax collections rose 22%, customs duties rose 30% and services taxes rose 30% -- all above the budgeted targets for this year. While some of this nominal buoyancy is undoubtedly because of elevated inflation levels, it is also indicative that activity has not completely fallen off and further that fears of a fiscal blow-out are exaggerated.   RBI expected to continue monetary tightening in September   The global uncertainty over the last few days and the corresponding softening of global commodity prices has increasingly led some market participants to believe that the RBI will pause its rate hike cycle at its September review.   We believe otherwise. The high frequency indicators over the last 24 hours have confirmed what we have always believed – that the economy is slowing but not slowing enough to take away producer pricing power and reverse increasingly entrenched inflationary pressures and expectations. As such, unless the inflation prints over the next two months demonstrate a sharp reduction in headline and core inflation (which appears very unlikely) or global commodity prices were to plunge in the ensuing weeks, we expect that – despite the global uncertainty – the RBI will raise policy rates by another 25 bps at its next review in September.