IIP analysis: Experts see further downside to growth ahead

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The September IIP, or index industrial production, has come in at 4.8% up from 1.3% during August and 6.98% year-on-year. The manufacturing output is up at 4.8% compared to 7.45% year-on-year. The capital goods output is up at 18.8% against 20.9%; mining output is up at 5.7% against 4.9%.

 

Shubhada Rao, Chief Economist at Yes Bank feels that going forward, think it's going to be a tougher journey all through. "We haven't even yet captured in the credit market disruptions in the Indian economy and those will get factored in", she said. She is looking at a significant downside risks to growth at this point in time. "I would think at our current forecast of GDP (Gross Domestic Product) of 6.8% there is a fair amount of probability of drifting lower up to 6.5% as well", she said.

 

Koushik Chatterjee, CFO of Tata Steel feels that one has got to see as to where the next two-three months pan out but certainly the GDP outlook for the year looks to be much more depressing than what one has seen in the estimates pre-September.   

 

 Here is a verbatim transcript of the exclusive interview with Shubhada Rao & Koushik Chatterjee on CNBC-TV18. Also watch the accompanying video.

 

Q: Is this the last of the best numbers or relatively good number we have seen on IIP growth?

 

Rao: I would tend to agree that because what we have seen is the first half which has seen quite a bit of volatility, the August numbers were very low so September numbers coming at 4.8% inline with expectations most of us were expecting a rebound from that tip. But going forward I think it's going to be a tougher journey all through because we haven't even yet captured in the credit market disruptions in the Indian economy and those will get factored in. So we are looking at a significant downside risks to growth at this point in time. I would think at our current forecast of GDP (Gross Domestic Product) of 6.8% there is a fair amount of probability of drifting lower up to 6.5% as well.

 

Q: What's your sense of the way the growth outlook seems to be panning out based not just on these IIP numbers but the fact that October will be where the real hit comes in?

 

Chatterjee: I think we have to watch out for whether this is a trend or whether we can come out of this issue because October witnessed a lot more severe liquidity issues as well as credit issues across the chain, across all sectors. So we got to see as to where the next two-three months pan out but certainly the GDP outlook for the year looks to be much more depressing than what we have seen in the estimates pre-September.   

 

Q: Would you hazard a guess at what we will end the year with in terms of GDP growth numbers?

 

Chatterjee: My sense is more on 6.8% - 6.9% because we have seen significant run in the first six months.

 

Q: Couple of questions on steel: We have Fitch revision of rating from stable to negative for Tata Steel. Corus has announced 30% production cuts for the next six months and now the domestic steel lobby is crying out for imposition of duty and import duty on steel. What's the outlook for the steel sector over the next few months?

 

Chatterjee: To clarify on the Fitch issue, I think the Fitch revision is on the outlook; the ratings have been reaffirmed as per the earliest rating. This has been the same trend for the other two credit rating agencies, Moody's and S&P's (Standard & Poor's) has also changed the outlook given what's happening externally but the ratings have remained same. So I do not think there is much to look into it.

 

Q: Any capex cuts that we may expect from Tata Steel over the next couple of months. Are you relooking at your expansion plans?

 

Chatterjee: Not really because if you have a capital expenditure in India which is so far given plus 40% EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) which has got high ROIC (Return on Invested Capital) and a return profile and the fact that structurally supply constrain still remains and remains deep. I think implementation and execution of capex efficiently remains one of out primary goals. 

 

Q: I think there is lot of talk through this week especially after China's announcement of more fiscal stimuli across the world. Any out of the book innovative ideas of what the government can do here to shift the focus from inflation to growth and help boost growth to some extent?

 

Rao: For this, I think we need to get the perspective right that here the slowdown has got accelerated purely because of the liquidity crunch that we saw beginning mid-September. We haven't seen serious demand destruction yet, it could definitely pan out if investment spending slows down considerably. So with a lagged impact we will see. So keeping those factors in context, I would think we need to identify which are the industries which are going dramatically in a degrowth zone which are textiles, leather, wood all these are industries which are generally traditional sectors which are also labour intensive. I think we could look at fiscal package specially designed to all these industries which could then help alleviate any potential problem that we may see in demand destruction.

 

So my sense is broadly yes, we need to look at an interest rate cut; no two ways about it. We need to see the system in fair amount of reverse repo so that we enable the entire interest rate corridor to drift lower and enable a reverse repo cut. So one action could come from the monitor policy front savaging liquidity concerns as well as nudging the interest rates much lower and quickly and the fiscal package though we don't have significant room the way China would have because our fiscal concerns are far too many in terms of subsidy burden so far.

 

Q: To focus more on liquidity measures and then target your fiscal measure so to speak to specific industries that's what you are saying?

 

Rao: Absolutely.   

 

Q: What kind of trickle down impact could the steel sector or other metal sector or commodity sector expect from Chinese announcement that came in over the weekend because the first two days of these week all the metal stocks rallied of course that has changed now. But what kind of trickle down impact can you expect. Are you expecting any kind of targeted fiscal stimuli in this country?

 

 Chatterjee: To answer your first part of the question, I think China has been a great growth engine for the world in the last decade or so and therefore when you come across and announce USD 586 billion fiscal stimuli, it certainly going to have an impact all across.

 

But its more important to understand that the fixed asset investment or infrastructure investments specially for a country like India will become a key trigger for the economic engine to continue the way it has been in the last couple of years and India certainly needs policy boost to ensure that the infrastructure sector as well as the large projects which are on the anvil which should get executed and we need to ensure that we have the liquidity and we have the right policy framework in place.   

 

Q: I urge you to get more specific when you talk about policy boost because the time now is for out of the box ideas, long-term infrastructure spending because infrastructure projects would take a few more years to come in. that is not going to solve the current temporary crises that we have at hand?

 

Chatterjee: If I can say there are greenfield projects in the steel industry itself which are of significant capex. If there are adequate measures taken to ensure the approvals are expedited, to ensure that the infrastructure is put in place. I think people will start spending. the facilitation process needs to be faster and I think if all of that is been put in place there are thousands and thousands of crore of projects which can go ahead.