Punctured optimism

The IIP numbers are bad news for markets which have been saved so far by excess global liquidity

The equity market is generally said to be a lead indicator of the economy’s future progress. Thus, when markets pierced the 20,000-point mark in January 2013, expectations mounted that the economy was finally turning, especially after the finance minister made some sweeping announcements.

However, a series of data has almost completely punctured the optimism. First, was the Reserve Bank of India’s (RBI) monetary policy. Though the central bank cut repo rates, its comments highlighted the headwinds facing the economy. RBI also hinted at a slower-than-expected pace of interest rate cuts, going forward. The second was the Central Statistics Office reducing the gross domestic product (GDP) estimate for the current fiscal to around five per cent. With the first half of the year recording 5.4 per cent growth, this implies that the second half would see a slower 4.6 per cent growth. While GDP for the third quarter will be declared by end-February, IIP numbers declared till date suggest a poor print.

The latest index of industrial production (IIP) for December 2012 stands at minus 0.6 while that of November 2012 was revised downwards to minus 0.8. The blip in October 2012, a festive month, resulted in a sharp rise in IIP at 8.3 for that month.

More than the weakness in the absolute negative number in December IIP, it is the penetration of this weakness to various sectors that is disturbing. Apart from electricity, both mining and manufacturing continue to show negative growth. Further, 12 out of the 22 industry groups in the manufacturing sector posted negative growth in December 2012. On a user basis, five of the six sectors show negative growth. The much-watched capital goods sector shrank 0.9 per cent, while the worst was an 8.2 per cent de-growth in consumer durables as the festival season came to an end.

This time around, the slowdown has started impacting corporate results, too. Data accumulated by BS Research Bureau show sales growth of 1,502 companies that have announced their results so far, have slowed to 12.93 per cent, compared to 19.14 per cent growth in the December 2011 quarter.

Clearly, a slowing economy has caught up with the financials of India Inc and the only reason it has not penetrated the equity markets is the excess global liquidity. But, if the data continue to deteriorate, it is only a matter of time before money moves on to better destinations.