Nov IIP: Growth stable; see 5.5% GDP for FY13, say experts

India's industrial production contracted to a four month low of 0.1 percent in November as compared to a year ago period owing to poor performance of the manufacturing and mining sectors along with a decline in production of capital goods. The industrial output, as measured by the Index of Industrial Production (IIP) dipped from a robust 8.3 per cent in October.

Sonal Varma of Nomura Financial Advisory and Securities feels the momentum in the industrial sector seems to be stabilising and if it continues, the segment may show a significant pick up in the December quarter.  According to her, the growth cycle itself seems to be stabilising and that is a positive sign.  Besides, Varma feels that if the current trend in industrial production for FY13 continues, there is no reason to be pessimistic and expects 5.5 percent GDP growth for the current fiscal year.  Gaurav Kapur of Royal Bank of Scotland is also of the view that the nascent signs of improvement are now visible in the purchasing managers index (PMI) numbers of December. “A pick up may still take time but clearly things are not getting any worse. Hence, the IIP data or whatever information you can gather from this one number or even the series in the last couple of months, points to the fact that we have hit a bottom. Things have turned around,” he explained.  Must read: IIP contracts by 0.1% in Nov, may prompt RBI to cut rates Here is the edited transcript of the interview on CNBC-TV18. Q: Any first thoughts? Varma: Given that there was a loss in working days, minus 0.1 percent on a seasonally adjusted basis, there is a very strong momentum. Q: What would the overall outlook be? Does your second half outlook improve? Varma: If October and November itself has been around 4 percent odd, it looks like in terms of the momentum at least the industrial sector which is actually what primarily drives business cycles, seems to be stabilising and if this momentum continues in December then there will be some pick up in the industrial segment in the December quarter. I guess the overall picture that is coming up suggests that the investment side is still weak. It seems largely that the consumer durable side has surprised positively. It could be because around Diwali there has been an increase in production as production was cut quite substantially. We need to see how sustainable this is because looking at the commercial vehicle numbers, we do not get any sense of comfort that indicates that the cycle is turning around so soon. Yes, it is clearly stabilizing and that itself is positive right now. We are stabilizing overall on the growth cycle right now. Q: Wanted to concentrate on the consumer durables point or consumer goods in general because in the previous month it was 13.2 percent but, this time it has come in at around 1 percent growth. In the previous month when we were looking at it in terms of September and October data, consumer goods actually came out as a saw point in that amount of data. Do you think the trajectory of consumer goods is now more positive vis-à-vis the decline that we had seen and besides what we saw in the Diwali months? Varma: Looking at the year over year numbers, it is very difficult to paint any picture. Even for the consumer durables side, a positive reading in our view is actually a good number. As for the other segments, a positive reading means that underlying there has been a pickup in momentum. If you look at three month moving average so as to smoothen out the volatility, it would suggest that consumer durables is also probably seeing some uptick.  But, we are starting from very low levels and the best way to describe it would be that the economy is clearly bottoming out with initial signs of pickup. That is where we are right now overall on the cycle. _PAGEBREAK_ Q: What were you working with? We have got minus 0.1 percent, a flat industrial performance. The index would be at 167 exactly where it was in previous November, what do you make of this? Inspite of shortened months of production we have done this. We have also got nearly 2 percent growth in consumer durables. Is it a heartening number? Kapur: The number is by and large in line with what we were expecting or what the general consensus was. Considering that it is not too much in the negative means that yes, the improvement or the nascent signs of improvement which we have been seeing for the last couple of months now are visible very clearly in the purchasing managers index (PMI) numbers of December.  Those are getting some strength and they are gathering momentum. In case of the economic momentum, clearly activity levels have bottomed out. A pick up may still take time but clearly things are not getting any worse. Hence, the IIP data or whatever information you can gather from this one number or even the series in the last couple of months, points to the fact that we have hit a bottom. Things have turned around. Q: Is the pickup looking good enough for you to expect that we will post a positive number in December? Varma: From a base effect perspective, I don’t think there was any adverse base effect per se. Every December you will see that the index tends to pick up quite substantially. If the momentum is strong then there should be no problem in posting a decent reading next month. Q: I want to ask you about the capital goods index because the volatility continues. But, what is the trend with regards to capital goods that you see because last month was actually a growth and this month we are back into a decline mode? Varma: What we are seeing on the capital goods side is that we are just contracting at a slower pace. If you look six months back, this segment was contracting at 15 to 20 percent. I don’t think investment has really picked up because if you look at the commercial vehicle numbers, then their production is still falling at 50 percent year over year. Going forward, our expectation though is that if the reform efforts really help, then some of the projects that have been stuck because of approvals not coming in etc should start moving. So what we are expecting is more of a debottlenecking led investment growth this year. Hopefully, if that pans out then we should see capital goods improving. But, that will be more an FY14 story rather than in the next two to three months per se. Q: I wanted to come to you with this question because HSBC downgraded estimates for gross domestic product (GDP) for FY13 to 5.2 percent and we had Credit Suisse which downgraded it marginally to 5.7 percent vis-s-vis 5.9 percent earlier. One, would you be as pessimistic as one of your peers such as HSBC in terms of the GDP estimates and what would your estimate be as a whole in terms of the trajectory for FY13 as well as FY14. A formidable pick up like Rangarajan estimating at around 7 percent? Varma: If we are seeing this trend in industrial production for FY13 and if this is really sustainable then I would not be too pessimistic. Our expectation is around 5.5 percent for FY13 and given the trend that we have see in the domestic industrial production numbers as well as some of the export data that has come out in other Asian countries for December which has positively surprised, probably we are okay on our forecast. There is no need to be excessively pessimistic. As far as FY14 is concerned, though as of now, we are not as optimistic. We do think there will be a gradual pick-up in growth. We are at 6.2 percent. The only reason we are not being too optimistic for FY14 is, unlike 2008 India does not have too much spare capacity to accommodate growth rebounds. So while demand is picking up, the question is, if your current account deficit is at 5.5 percent of GDP, credit deposit ratio is at above 75 percent then where is the financing of this extra demand going to come from? Our view is growth is picking up quite well. But, very soon we will again start hitting bottle-necks because we have become a very severely supply constrained economy in the last two-three years. Q: Even if we get a good WPI number and this diesel hike which we have been long speaking about, is the Reserve Bank going to give you a lot of cuts? How many cuts are you really expecting in terms of basis points in 2013 given this monstrous current account deficit? A: We are expecting 50 basis point rate cut in the first half of 2013. Our view is that we are now in a period, at least in the next three to six months of low inflation and the RBI is going to opportunistically use this window of opportunity of low inflation to deliver rate cuts. Given the constraints we face on current account or the fact that our output gap is also closing, our view is inflation will start inching higher in the second half. So we do see RBI actually pausing in the second half of 2013.