IIP growth contraction in Nov’12 at 0.1% YoY marked realignment to the muted growth trend seen during most of this fiscal. It follows an erratic 8.3% YoY bounce in Oct’12.
In FY13, 5 out of 8 months have shown YoY contraction. YTD growth for Apr-Nov now stands at 1% vs 3.8% last year.
November release is accompanied by the upward revision for Oct’12 to 8.3% from 8.2% and downward revision for Aug’12 to 2% from 2.7% (provisional). The November IIP also witnessed a 1.4% on month contraction on a seasonally adjusted basis and follows a sharp 5% on month rise in Oct’12. This would imply that Nov IIP was weak tracking both an unfavorable base effect and sequential weakening.
Outlook: Downside risks remain
Forward looking indicators for December point at a muted growth momentum going ahead. Truck sales contracted in December and overall commercial vehicle sales contracted 13% in December. Huge truck inventory, lower realizations/resale rates, dropping truck rentals all hint at a lower truck production demand.
Passenger car sales have also contracted by 1.1% in the month of December hinting at a demand slowdown. Two wheeler sales witnessed a marginal improvement at 4.5%. Vehicle sales act as a strong lead indicator for future production. Industry sense on Cement production in December also hints at an improvement compared to November.
Base effect remains favorable for December IIP data (IIP fell to 2.7% YoY in December from 6% YoY in November).
I expect December IIP to grow at lower single digit rate.
Overall, there is high likelihood of FY13 estimated IIP growth to remain very modest (1-2%)
Much awaited rate cuts at sight
Overall, I believe rising cost structure and weakening demand will keep the inflation-growth friction alive. Amidst the proposed measures with respect to price hikes in petro products, one can expect upside risks to inflation will persist.
However, tumbling IIP numbers and WPI below 7.5% (estimate) may push RBI to stand by its guided commitment of rate easing in the fourth quarter. With RBI placing greater focus on spurring growth, the January policy could witness the commencement of the much awaited rate easing.
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The author is a Chief Economist with Emkay Global
