Indranil Pan: Worst may be over for industrial production

Nov IIP has surpassed market expectations, my expectations

No doubt IIP growth reversed trend in November after a stellar 8.3% in October. This is because of the seasonal factor whereby the manufacturing segment re-stocks ahead of the Diwali festive demand, which was anyways not expected to sustain. However, it was heartening to note that the growth was better than the market expectations and also my own expectations of a (-)2%. More importantly, even as the capital goods growth tipped back to the negative zone, the extent of festive-effect correction appears to be lower this year than in the last, probably an indication that the worst in the industrial production could be over.

Unlike the last cycle of economic upswing for India, any uptrend at this point in time is unlikely to be investment led. Apart from interest rate as an argument, the visibility of demand in the current scenario, both from the domestic side as also the international arena appears to be weak and hence not justifying any capacity build-up. Further, the government is trying to constrict expenditures in a very significant manner; hence there is little hope of infrastructure investments to start up immediately.

Hence, any pick-up in the domestic growth is likely to be underpinned by a growth in consumption demand. And, conditions might just about be building up for the same. The consumption pattern could get better off as (1) global outlook appears to have improved at the margin, indicated also by the ECB commentary supporting no change in monetary policy. This could lead to some improvement in exports. Infact, export growth was at -1.9% for December, better than -4.2% for November, (2) rising wage levels both at the rural and urban segment as also likely better agricultural incomes, (3) softening inflation on a relative basis and (4) improved domestic sentiment and the current rise in the equity markets.

We anticipate a 25 bps Repo rate cut by the RBI on 29th January, as we think that the RBI could now prefer to support the small recovery signs in the economy. This is on the back of a belief that there is unlikely any significant adverse shock in the inflation dynamics in the months to come. However, the accommodation to growth from the monetary policy side could remain limited without any scope for a sharp drop in inflation (especially retail inflation), and continuing worries on the fiscal and CAD front. Thus, I hesitate to look at any V-shaped trajectory of recovery for India in the year ahead but build in an expectation of 6.2% GDP growth in FY14, up from 5.6% expected for the full year FY13.
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The author is the Chief Economist with Kotak Mahindra Bank