Industrial production numbers do a 180 degree
India's industrial production growth rate was back in positive territory at 5.9 per cent yoy for November 2011 reversing the downtrend of the previous five months and rebounding from a 28-month low of -4.74 (revised from -5.09) per cent in the previous month. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for November 2011, registered yoy growth rates of - 4.4%, 6.6% and 14.6% respectively. The cumulative growth in the three sectors during this fiscal, April-November, 2011-12 over the corresponding period of 2010-11 was -2.5%, 4.1% and 9.5% respectively; over April-November 2011, IIP grew 3.8 per cent, as compared with 8.4 per cent growth seen in the same period in the previous year. Growth has been broad-based in November as 17 of the 22 industry groups in the manufacturing sector showed positive growth during November 2011. The industry group ‘Publishing, printing & reproduction of recorded media’ showed the highest growth of 69.1%, followed by 41.8% in ‘Medical, precision & optical instruments, watches and clocks’ and 29.3% in ‘Food products and beverages’. On the other hand, the industry group ‘Electrical machinery & apparatus n.e.c.’ showed a negative growth of 38.7%. The rebound in IIP for November 2011 has been largely led by a sharp growth in consumer goods output, which recorded 13.1 per cent growth as against near stagnation in the previous month, however, on a very low base of 0.7 per cent growth in the previous year. Within the consumer goods space, consumer durables registered growth of 11.2 per cent compared with 7.2 per cent in November 2010. Consumer non-durables registered 14.8 per cent growth in November 2011 as against a decline of 4.4 per cent in the same month in the previous year. The manufacturing sector, which accounts for 75 per cent of the IIP, recorded 6.6 per cent growth in November 2011 against 6.5 per cent in the same month in the previous year and a negative growth of 6 per cent in October 2011. Capital goods output (a proxy for investment activity in the economy) fell 4.6 per cent in November 2011 compared to a 25.7 per cent growth in November 2010, however, a significant jump from the. 25.5 per cent fall in October 2011. Electricity generation recorded a strong growth of 14.6 per cent in November 2011 as compared to 5.6 per cent in the previous month and 4.6 per cent in the same month last year.
What other numbers say
Analysts and industrialists alike justifiably see the rebound in industrial growth as per November IIP figures to be driven by transient forces and stress that this recovery needs to be seen with caution as fundamental trends remain weak. Seasonal (festival) demand led inventory re-stocking, fluctuations in auto output and improvement in lead indicators had pointed towards a firmer production number, which has materialised but a moderation is expected given the overall slowdown in capital investment sentiment. According to data from the Centre for Monitoring Indian Economy (CMIE) new investment proposals in 2011 fell 45% to a five year low of 10.46 lakh crore, from 18.88 lakh crore a year earlier. According to a RBI study the overall performance of 2,643 select (non-government non-financial) listed companies showed some moderation during April-September 2011 wherein the sales grew by 20.8 per cent vis-à-vis 21.5 per cent during April-September 2010 and, growth in profits declined sharply as compared with the corresponding period of previous year largely on account of higher input costs and significant increase in interest payments. Profitability in terms of operating, gross and net margins contracted by 200, 140 and 190 basis points, respectively in the first half of 2011-12 over the corresponding period of the previous year. Interest burden of these companies increased by 5.0 percentage points due to a faster increase in interest outgo in comparison with gross profits. A study by CRISIL Research has revealed that the interest paying ability of 420 companies in the S&P CNX 500 Index (excluding BFSI and public sector oil marketing companies) has dipped to a five-year low. The median interest coverage ratio has fallen to 4.8 times in the July-September 2011 quarter against 7.8 times in July-September 2010; average interest coverage ratio for these companies in the past five years was 8.4 times. Overseas direct investments by Indian companies in the first nine months ended December of the current fiscal (2011-12) fell by 28.32 per cent to $25.25 billion as against $35.23 billion in the same period of last year, according to figures released by the RBI. As per the RBI figures, overseas FDI by Indian companies amounted to $33.89 billion in calendar 2011 as against $40.45 billion in 2010, indicating a decline of 16.2 per cent. Overseas investments by Indian companies stood at a one-year monthly low of $1.46 billion in December 2011; outbound FDI last month was almost 47 per cent less than the $2.74 billion in November 2011. Experts attributed the decline to the global economic slowdown and uncertainties surrounding funding of overseas investments. However, while Indian companies invested less abroad, the FDI inflows during the April-November period have risen to $22.83 billion compared with the FDI inflows of $19.43 billion in the last fiscal (2010-11). A report by research firm Venture Intelligence shows private equity firms made investments worth $10.11 billion in India during 2011 by way of 441 deals, compared to $8.1 billion through 362 deals in the previous year, taking their total investment over the past five years to about $47 billion. Interestingly, PE firms invested $2.68 billion into real estate firms during 2011, a 69 per cent jump vis-a-vis the year-ago period. PE investment in October-December, 2011, however, declined to about $1.4 billion across 105 deals from $1.8 billion across 88 transactions in the same period of 2010, largely due to economic uncertainty and the decline in equity markets. Rating agency Moody's Investor Services upgraded India's short-term foreign currency rating from 'speculative' to 'investment' grade. This has come in addition to last month's upgrade in the credit rating of government's bonds from 'speculative' to 'investment' grade. Thus, several other numbers swing between positive and negative for the Indian economy in the near term.
Inflation numbers on the positive side for now
Inflation numbers and inflationary expectations are now on the positive side; food inflation stayed in the negative for the second week running at -3.36 and -2.90 per cent in the last two weeks of December. WPI inflation, which has been softening over the past months, came down to a two year low of 7.47 per cent for December. However there is good reason to believe that as the high statistical base effect wears off, food inflation will jump back to levels of over 5% as major structural problems continue to persist; as the Planning Commission's principal adviser pointed out the structural issues that forced average food inflation to remain around 7% between 2004 and 2009 are yet to be addressed.
Non-traditional measures for revival?
It is difficult to single out the role of RBI’s 13 interest rates hikes in controlling inflation as this downtrend in inflation is concurrent with retreating global commodity prices. Thus the timing of the rate reversal cycle is likely to be delayed till March, till the time there is more clarity on the inflation trajectory. The problem with growth revival is the fact that with fiscal deficit slated to overshoot the target 4.6 per cent by about 100 basis points, there is little fiscal lee way available for sops to industry or exporters to counter the high interest rate regime which have put industry in stress. Thus a slew of innovative measures are likely to be adopted to build on the current spate of good economic numbers to revive the economy without raising fiscal deficit even further; if well thought out and executed these could indeed provide a stronger base for growth in the medium term.
