Economy: Beyond the data issues growth remains weak :: Kotak Securities PDF link

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Economy
Industrial Production
Beyond the data issues growth remains weak. Rather than the February IIP growth
of 4.1%, the highlight of the IIP release was the massive revision of January IIP to 1.1%
from 6.8%. Anyway the IIP was not the key determinant in RBI’s monetary policy
decisions due to the intrinsic volatile nature of the series. With the data issues coming
to the fore, this IIP series could attract even lesser weight from the RBI. That said, IIP
outturn indicated continued weakness in the industrial sector with moderations in both
the capital and the consumer sides of the story. We expect a 25 bps cut in repo rate
from the RBI on April 17 given the need to see some pick-up in the investment cycle as
well as provide a boost to sentiments
Sugar production data misreporting leads to expectations mismatch
According to the press release addressing the change in the January release, sugar production was
5.8 mn tons in January which was misreported as 13.4 mn tons. This item has a 1.5% weight in
the IIP and this error led to downward revisions in the (1) manufactured products on sectoral basis
and (2) consumer non-durables on the use-based side. Manufactured products growth was revised
down to 1.4% from 8.5% while consumer non-durables growth was revised down to 11% from
42.1%. While we had highlighted in our IIP comment on March 12 (‘Positive, but does it make
much sense?’) that we were puzzled by the abnormal production growth in consumer nondurables and that such a trend is most likely not to sustain, we were certainly surprised by the
degree of revision. Markets were expecting IIP growth to be in line with January (earlier released)
number of 6.8% but expectations went awry due to the degree of revision.
The theme continues to be of a weak economic growth, though very minor positive exists
A certain degree of cautious optimism was taking shape after a January (pre-revised) growth of
6.8% and a February expectation of around 6.5-7.5%. However, the February outturn of 4.1%
(and January revised outturn of 1.1%) is likely to negate much of this optimism and clearly
highlights a continuing slow trajectory of production on a 3-month moving average basis. Beyond
the headline growth, the mom growth for February (that is usually a weak month in the calendar
for manufacturing) shows a contraction of 1.4% that is better than the average contraction of
~3.4% witnessed over the past few years. Importantly, forward looking indicators such as the PMI
has been indicating a bottoming out of the slowdown story and some signs of a saucer-shaped
recovery. Even as PMI manufacturing was at 56.6 in February after 57.5 in January, both these
readings indicated an expansionary phase. Further, order backlogs index was also up to 56.4 in
March from 52 in February. This might be indicative of a restocking phase being underway which
usually signifies the bottoming out of an economic/investment growth cycle. However, a very
strong recovery process is unlikely to materialize as the investment cycle is expected to stay weak
with weak global and domestic sentiments.
RBI’s policy decision could be touch-and-go
Lower growth and yet persistent upside inflationary risks have led to intense debates on the next
move from the RBI so far as the interest rate cycle is concerned. According to basic central bank
practice, inflation, growth and labor market data are the absolute essentials for policy decisions.
With regular labor market data almost absent in India, data quality issues further convolute the
problem for the RBI. We believe that the RBI will start the rate cutting cycle with a 25 bps
reduction in the repo rate on April 17. This could be determined by factors such as the need to
nurture the nascent growth uptick alongside the current soft bias in the inflation trajectory.
Further, the loss of pricing power of corporate houses also points to relatively weaker demand
conditions in the economy