Sept IIP data indicates trying times ahead

The September IIP numbers have come in far worse than expected, at 1.9%, on account of negative performance by the capital goods, mining and consumer non-durables sectors. The mining output has nose-dived lower than what was seen in August 2011. In contrast, the electricity sector has shown good performance on a YoY basis as a result of capacity additions undertaken over the past one year. During the April-September period this fiscal, IIP growth stands at 5.0%, as against 8.2% in the same period last year.

This recent set of IIP data has come on top of the data this week, which showed that October 2011 export growth recorded its worst annual pace in two years, while car sales last month declined the most in more than a decade.

One glance at the table above reveals that the fall in the Sept. 2011 IIP numbers, coupled with the dismal performance seen in the IIP for the months of August and July, confirms the fears of a slowdown in the economy, and indicates trying times ahead.
 
Even the market, which usually tends to discount such data well in advance of its announcement, was taken by surprise. The street expected Sept 2011 IIP data at 3.5%, but a meager 1.9% sent the markets into a selling spree. The BSE touched a low of 17096.84 post the announcement, which was 1.5% below Wednesday’s closing. 

Previously, the IIP growth figure for August this year had also been revised downward to 3.6%, from the provisional estimate of 4.1%.

Now, all eyes will turn towards the headline inflation data for the month of October, which is expected to be announced on 14th November, 2011. The inflation data for the month of September 2011 was at 9.72%.

Judging by the recent set of inflation internals reported over the past few weeks (following Diwali), one can expect the October inflation to come in at a high and stubborn note, which will raise further doubts over the RBI’s proposed stance on policy reviews. The RBI, which has hiked interest rates 13 times since March 2010 to tame inflation, had recently guided that it may take a pause in its stance in the Q3 review, if inflation is well within its projections.

Overall, we, at DSIJ, do expect inflation to be tamed a bit from November 2011 onwards, as what we may see in October would be an effect of the festive season, where demand is usually high, leading to inflation.

India's economy grew by 7.7% in the April-June 2011 period, the slowest in six quarters. Judging by the latest set of IIP data, one can expect the full year's growth to be well below 7.5%, which is a far cry from the 8.6% growth witnessed in 2010-11. Of course, it is best that we do not compare this to the govt's FY12 budget estimate of 9%, which is a distant dream in view of the current state of the economy.

In conclusion, we advise our readers to closely watch the headline inflation data on 14th November, 2011, as this will provide cues on the RBI’s stance in December. We also advise readers to keep a close eye on crude oil prices, which have seen a spurt recently, thanks to the re-surfacing of concerns on the Middle Eastern front.