Oct IIP nos robust: How real is the growth?

Excerpts from Your Stocks on CNBC-TV18 Watch the full show » RELATED NEWS Expect double digit IIP number: Udayan October IIP growth at 10.8% October IIP seen strong at 8.83%: Poll

Though October industrial production is better than expected, Samiran Chakrabarty, Head of Research, Standard Chartered Bank is not so upbeat.

In an interview to CNBC-TV18, Chakrabarty explained that every year in that month of festivities, the month-on-month growth is pretty significant. So, it is not really that momentum has shifted gears so much that it has moved from 4.4% to 10.8% within one month.

Gaurav Kapur, Senior Economist, Royal Bank of Scotland agrees that the numbers have definitely thrown up so some positive surprise but it  does not change their overall outlook, that we will see about 8.5% growth overall in GDP and industrial growth would be close to about 9-9.5% for the whole year.

Below is a verbatim transcript. Also watch the accompanying video for more.

Q: Does 10.8% IIP number surprise you, restores your face?

Chakrabarty: Our forecast was 11%. It is exactly inline with our forecast but this number needs to be looked at with some amount of caution because October was a month of festivities. Every year in that month of festivities, the month-on-month growth is pretty significant.

So it could be anywhere between 4-5% MoM growth during that festive season. What we are seeing today in October, the year-on-year growth is higher because last year the festive month was September not October. That anomaly is getting reflected in this 10.8% IIP growth number. It is not really that momentum has shifted gears so much that it has moved from 4.4% to 10.8% within one month.

Q: Does this positively surprise you? Will it make you relook the growth momentum?

Kapur: It does positively surprise us for sure but it does not make us relook the numbers because IIP numbers have been so volatile it's always better to look at them on moving average basis. The month of October coincides with festivals. Activity in general tends to be stronger. It was visible in the PMI as well.

You should correct for a very significant low base effect. It is an almost 4.4% jump in the headline because of the base effect itself. On 4.4% last month you had 8.8% just because of the base effect. Maybe this months number is surprising but it doesn't change our overall outlook, that we will see about 8.5% growth overall in GDP and industrial growth would be close to about 9-9.5% for the whole year.

Q: The capital goods index has risen by about 22% which is a fairly significant growth. We got such excellent gross fixed capital formation numbers both for the first and second quarter. Putting all these together and trusting the numbers for what they are, would you say that now the investment cycle and the consumption cycle is firing?

Chakrabarty: For the first time, the government has put out seasonally adjusted industrial growth numbers in the mid-term economic review presented in the parliament. If you look at the industrial growth seasonally adjusted, then for the last two-three quarters it has been gradually coming off.

We peaked out in terms of industrial growth somewhere around the first quarter of this year. Investment activity also in the non-infrastructure space, looks to be slightly soft at this point of time but infrastructure is changing the whole picture. That's why you are seeing extremely strong investment growth.

I suspect that we are now back to pre-crisis levels in terms of infrastructure growth. 15% investment growth in the last two quarters is exactly equal to the pre-crisis investment growth five-years ago. We will have to push this number closer towards 20% if we want to move towards the 9% plus GDP growth rate target that we have.

Q: Rubber prices are at Rs 200 per kilo, crude is at USD 90 per barrel. At a time when the West is at its sluggish worst and if one gives a fair chance that QE2 will give some kind of an impetus to consumption in the West, what is your estimate? Do you think that we are going to get into the throws of some fairly sharp commodity inflation and therefore we must be wary of what we are going to see in the first quarter calendar of 2011?

Kapur: I certainly feel that we need to be wary of inflation numbers in general. Food price inflation has become structural in nature and it has a demand side push to it. On top of that, if commodity prices globally start to pick up as they have in the last couple of weeks, especially after the announcement of QE2 we have a serious challenge in terms of controlling inflation.

Considering the RBI's target for this year is about 5.5% is such that even with stable commodity prices, it would have looked difficult to achieve. With prices moving up and with a likelihood of an increase in petrol and diesel prices, which have been talked about had had its impact across the supply chain and it shows up in the WPI in a much larger way. Overall, inflation remains, even going into 2011 and in the next fiscal year, a key challenge for us.

Q: What is your fourth quarter GDP forecast and your FY12 GDP forecast if you have any? Are you trimming it because of inflation and interest rate concerns?

Kapur: I am trimming my FY12 forecast for GDP. We are looking at a number close to about 8-8.25%. Inflation and higher interest rates will have an impact next year. We have seen momentum this year which will carry us towards more than 8.5% but as we get into the next fiscal year with higher interest rates and with an uncertain global environment, I don't think we are out of it yet.

The fact that you have high inflation especially in essential commodities will have some impact on consumption subsequently and that for the investment cycle we have seen fair amount of volatility. From 19 to 11, I would look at it as a slowdown in investment activity than a consistent pickup because what we need is investments to consistently grow at over about 20% for us to consistently achieve over 8% growth and aspire for 9% kind of growth.

Q: At a time when we think only one half of the world is growing, if it is indeed one half, will we start using the word overheating pretty soon? What's your guess in terms of inflation and interest rates for 2011 and your GDP forecast for FY12?

Chakrabarty: Currently the commodity price inflation that we are seeing across the globe is more in the hope of growth than growth itself. After a long time, the markets are realizing that the policy cupboard of the developed world is not bare; they still have some ammunition with them which they can unleash and get more growth out of their economies.

You are seeing their reaction to this realization donning in on the markets but as the taste of the pudding is in its eating this needs to be converted into actual growth. Unless that happens, some of these commodity price rises might fizzle out as the year progresses but there is no doubt that the risk of commodity prices is on the upside.

If we see moderate price increases or if commodity prices rise sharply, then there would be a growth slowdown across the globe and we cannot accept that. We will probably see inflation inching up in the second half of 2011 and it might even cross that 7% range again.

I will not be surprised with that at all. In terms of GDP growth, I think 8.5-9% GDP growth for FY12 is very much on the cards.

Q: What are you factoring in by way of RBIs action since in December they declared it will be a non event, no action policy? In 2011, what kind of rate increases are you looking at?

Chakrabarty: Around 50 basis points rate hike from the RBI is what I am looking at right now. This is with a moderate rise in inflation. If inflation rises faster then it could be even higher. The import thing is not rates but liquidity. Liquidity has to come back into the system very soon. Unless it comes back only then will there be growth impact.