Jan IIP beats street: How do experts read it?

The Index for Industrial Production (IIP) has come in at 3.7% for January, much higher than street estimates. According to a CNBC-TV18 poll, industrial output was estimated to be at 2.7% (YoY).

The capital goods sector has hugely disappointed with a degrowth of (-)18.6% versus 57.9% (YoY). However, surprises came in from electricity sector which saw an annual growth at 10.5% against 5.6%. Consumer non-durable goods grew at 6.9% (YoY) compared to (-)7%.

Starting from December itself, India has been struggling with a very high base which itself is bound to keep numbers a little lower. IIP had hit 20-month low of 1.6% in December.

Food and fuel inflation eased in late-February, but remained at elevated levels, maintaining the case for further monetary tightening to keep a lid on headline inflation.

India's food price index rose an annual 9.52% in the week to February 26, slower than a 10.39% rise in the previous week as prices of vegetables, potatoes and rice declined, data showed on Thursday.

The HSBC Markit Purchasing Managers' Index, an indicator of manufacturing expansion, rose to a three-month high of 57.9 in February from 56.8 in January.

That was the 23rd consecutive month the key index of manufacturing in Asia's third-largest economy has been above the 50 mark, that divides growth from contraction.

The manufacturing sector grew 5.6% in October-December from a year earlier, government data released on February 28 showed. India's exports in January rose an annual 32.4% to USD 20.6 billion, government data released last week showed.

Sector-wise growth in January

• Manufacturing sector growth at 3.3% vs 17.9% (YoY)
• Mining sector growth at 1.6% vs 15.3% (YoY)
• Capital goods growth at (-)18.6% vs 57.9% (YoY)
• Electricity sector growth at 10.5% vs 5.6% (YoY)
• Basic goods growth at 7.6% vs 11.5% (YoY)
• Intermediate goods growth at 7.9% vs 22.2% (YoY)
• Consumer goods growth at 11.3% vs 0.4% (YoY)
• Consumer durable goods growth at 23.3% vs 28.2% (YoY)
• Consumer non-durable goods growth at 6.9% vs (-)7% (YoY)

How do experts read the IIP data?

Siddhartha Sanyal, Chief India Economist, Barclays Capital said, "The IIP is a surprise on the upside at the margin. But the bigger picture is in terms of more macro fundamentals like inflation, liquidity, which show that we are not out of the woods. We are bearish on interest rates and liquidity. A better indicator of growth is intermediate sector and that shows that there are some problems regarding growth."

Sonal Verma, Economist, Nomura feels that another rate hike of 25 bps is likely on the cards. Verma added, "It's a strong number because it is coming on back of a very high base so sequentially the momentum seems very strong. There seems to be a pickup in consumer goods in general. Consumer non-durables have been weak for quite a long time so there is a rebound in this segment.

Manish Wadhawan, Director and Head of Rates Trading, HSBC India said that the headline number may look small due to base effect as the month-on-month rise in IIP at 1.8% is pretty strong.

On a optimistic note, Rupa Rege Nitsure, Chief Economist, Bank of Baroda is expecting IIP for FY11 to be around 8 %. "This will improve RBI's comfort level to continue with calibrated tightening," Nitsure said.

Ashutosh Datar, Economist, IIFL said that the sluggish growth as is being seen in IIP numbers is not worrisome. "There is some deceleration, but it is definitely not as bad as 2-3% growth. So, from a policy perspective the inflation data due on Monday will be far more crucial," Datar elaborated.

(With input from Reuters)

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