July IIP at 7.1% vs 5.4% in June; Experts bullish on growth

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July Index of Industrial Production, or IIP , numbers came in at 7.1% as compared to 5.4% in June. Capital goods were up by 21.9% as against 12.3% YoY. Consumer goods were up by 7.3% as compared to 7.1% YoY.

Consumer durables growth were up 11.2% as compared to a negative 2.7% YoY. Manufacturing growth came in at 7.5% as against 8.8% YoY. Mining growth stood at 5% versus 3.2% YoY.

So, what do experts read into these figures?

M Govinda Rao , Director, NIPFP , said IIP data is thoroughly obsolete. "They need to sort of rework this. In the last quarter or the first quarter of this year when capital goods sector showed an increase of only 6.8%, one can see that sales had increased by 20% during that period, but then production was down 30%. There is a lot of inconstancy in data, apart from the fact that they have not updated the type of industrial products that are required in the market. These numbers can only be taken as broad indicators."

 

Arvind Sampath , Director and Head-Rates Trading, Standard Chartered Bank, said it just reinforces the thought that the growth story is consistent and credible.

 

Shubhada Rao , Chief Economist, Yes Bank , said IIP is on an uptick from hereon. "This will essentially be supported through consumption goods. Overall, we are more optimistic about industrial growth from hereon."

 

Excerpts from CNBC-TV18 exclusive interview with M Govinda Rao, Arvind Sampath, and Shubhada Rao:

 

Q: Has the July IIP number come as a surprise?

 

Govinda Rao: It is indeed a pleasant surprise. We expected it to be in the region of 6-6.5%. It should cheer the market quite a bit.

 

Q: What would you make of this number? Does this dampen bond markets hopes? Will the Reserve Bank be emboldened to stay tight if the need arises?

 

Sampath: This is a very good number. It just reinforces the thought that the growth story is consistent and credible. The market was probably looking at around 6%. So, it is a breath of fresh air. We have to look at the market and see what it is doing. SLR demand and statutory reasons are still there, but we could go in for a prolonged period of consolidation, given where yields are already.

 

Q: With capital goods once again growing in strong double-digits, would you want to revise any pessimistic views?

 

Govinda Rao: I don't think we have been so pessimistic. Last quarter, there were fears of a slowdown when capital goods increased only by 6.8%. From April to August, the average monthly investment commitments are of the order Rs 1,44,000 crore as against Rs 1,10,000 crore in the same period last year. I don't see any serious problem there. The key here is infrastructure investment. Once companies have their infrastructure investments in place, industrial growth will be quite satisfactory.

 

Q: The Economic Advisory Council of which you were a member had come up with a 7.7% GDP number. Would you be more comfortable with 7.5% or 7-7.5%? Do you want to rethink that number considering that IIP numbers are not getting cowed down?

 

Govinda Rao: Any projection at this stage will only be an informed guess and nothing more than that. There are various projections varying from 7.5% to 8.5%. The Economic Advisory Council had estimated growth in the industrial manufacturing sector to be around 7.5%. Part of the reason why there is a 22% jump is because of the lower growth last quarter. Overall, it is good sign but we still have to see if there is sufficient liquidity in the market, because the SLR bonds are not available in sufficient numbers. But credit growth has been quite impressive.

 

Q: What is your take on bond markets, do you think it will now start becoming a little pessimistic?

 

Sampath: Yes. We are coming on the back of a very sharp rally. Yields have fallen in the last two months by almost 100 bps. The reasons are all there. Next fortnight, would be a period of consolidation. About 8.3-8.4% is a key level as it is from here that bonds actually turned in the last two years. So, giving credence to the level, we will consolidate a bit. The reasons for moving up as well as down are strong. So, we would we consolidate and move in this range for a while, only then can we take a fresh call.

 

Q: What would you make of RBI's action at this point in time? Yesterday's inflation number was a bit of a jar and today's IIP number is positive. Both of them should normally make the central bank hawkish. What would be your expectation?

 

Sampath: The case for tightening at the margin has slightly gone up. We are much closer to an election, which means we have to bring inflation expectations and demand control inline with stated objectives. To that extent, the case has become stronger. We have to wait and watch, and see how oil performs and global markets respond. We still have 30-45 days.

 

Q: Will there be some kind of a rate action in the next three months or would you just leave it to incoming data?

 

Sampath: We would leave it to incoming data. The bias for tightening is a tad higher.

 

Q: Do you think there is case for an upside surprise in future numbers?

 

Rao: Yes, because for the year our own estimate is around 7.5% for IIP. IIP did bottom out in May at around 4% or so. From hereon, we see improvements and some interim dips. We see some bit of dip in August itself. I think IIP is on an uptick from hereon. This will essentially be supported through consumption goods.

 

What was really positive was data from the capital good segment. Within capital goods, power sector related capital goods have once again been on a revival path, which is good news. We do not have detailed data for last month, but there has been a sharp uptick in capital good items like turbines, insulated cables, and wires, among others. The confidence is back that capital goods maybe once again on an uptick. The fatigue that we were seeing earlier on in Q1 is probably behind us. Overall, we are more optimistic about industrial growth from hereon.

 

Q: There was important paragraph on consumer goods contraction last year in the RBI Annual Report. In the last nine months of 2007 we had seen a contraction in consumer durables. According to the report, RBI's Economic Analysis Wing found that 41% was contributed by about 10 articles which were things no sane person would buy these days. These include tape recorders, telephone instruments, typewriters, and alarm timepieces etc which forms 41% of the weight in consumer durables. So, how relevant is IIP?

 

Govinda Rao: IIP data is thoroughly obsolete. They need to sort of rework this. In the last quarter or the first quarter of this year when capital goods sector showed an increase of only 6.8%, one can see that sales had increased by 20% during that period, but then production was down 30%. There is a lot of inconstancy in data, apart from the fact that they have not updated the type of industrial products that are required in the market. I don't think anybody buys a tape recorder or alarm timepieces etc. So, there is need for updating industrial numbers. These numbers can only be taken as broad indicators.

 

I don't think they can form a basis for investment decisions. The market understands this and that is why investments have been forthcoming even when the industrial output data had not shown signs of fast growth.

 

Q: What have you made about these IIP numbers and their translation into corporate profits going forward, considering now that we have had two-months of an uptick in them?

 

Rao: I think the first quarter was the most challenging in terms of environment both in terms of higher interest rates, inflation, input costs and so on. We have a lot of bad news being frontloaded in the first half of this fiscal. Going forward, I think profitability will improve. The commodities space is now easing and going forward it would put less stress on bottomlines. We expect retail demand to pickup going into the second half because of the fiscal stimulus. Putting all this together, I think corporate bottomlines will remain strong. They may not be as strong as they were last year, but because they have seen a lot of pain for sometime now, overall they are strong.

 

The weightage of industrial products and data flows need to change to arrive at the correct IIP figure. These two are a serious concern as IIP numbers is a representation of what the real economic activity is all about. Whenever we are looking at a revision, we need to look at data flows. For instance, in the whole of last year, we saw hair and ayurvedic oil contribute significantly to consumer non-durables space. Motorcycles also have a significant weight, so its contraction or expansion does change the fortunes of consumer durables. There is now an urgent need to review the entire weightage pattern as well as improve the quality data flow on all segments across the industry.

 

Q: While we may call the data names, that is all we have by way of indication. Looking at the WPI and inflation data, what should the Reserve Bank action be? Is enough tightening done or going by the erratic behaviour of inflation numbers and the continuation of M3 at fairly high level of 20%, is there still scope for RBI action?

 

Govind Rao: There is no case for tightening the credit markets at this stage. I don't think interest rates should be tampered with now. They should wait for some more time. Although this week has shown a higher inflation rate for essential commodities, there is a substantially higher procurement of food grains. Things are not too bad as far as supply management is concerned, maybe they should focus more on the supply management to keep inflation in check. Oil prices are coming down. Given all these factors, there is no case for increasing interest rates at this stage. We should leave it at that and wait for some more time before any further action is done. I think they should not meddle with interest rates for another two-three months.

 

Q: Do you think the fall is car sales is an ominous sign? Would that mean that we are going to see more pain than what we are prepared for?

 

Rao: There are a whole lot of other items which are representative of fairly healthy demand. I think it would be too hasty a conclusion to draw from one segment running into a softer patch as being a representation of demand for the entire sector.