India’s industrial production data is always a bit of a conundrum. Different pieces of data often show divergent trends. Even as PMI data touched a five-month high in November, industrial production data for the month is set to show a contraction. Following the festive season, when demand picked up, November’s index of industrial production (IIP) is expected to show a contraction, if consensus estimates are anything to go by. Economists expect IIP to contract by 0.4 per cent in November, in sharp contrast to the 8.2 per cent year-on-year growth seen in October. The reason: October would have seen plenty of re-stocking and as a result, November would have seen higher sales from inventories but the production would have happened in October. Shubhada Rao, chief economist at YES Bank attributes the robust growth seen in October to a combination of favourable base and sequential ramp-up of festival-related production.
October’s exaggerated growth seen in the manufacturing and consumer goods is not expected to last. Though the worst is over for the industrial sector, the recovery is unlikely to be V-shaped. Indranil Pan of Kotak Mahindra Bank believes that with economic growth picking up in FY14 to 6.2 per cent, industrial activity would also post a recovery, albeit not a sharp one. He believes a floor has been reached and from here, industrial activity may either move sideways or marginally up. There’s more pain left in the capital goods segment and the recovery will largely be driven by the consumer goods segment.
According to Bank of America Merrill Lynch (BofA-ML), November industrial growth will likely contract by 1.5 per cent (0.4 per cent consensus) on post-Diwali base effect after jumping 8.2 per cent in October to meet pre-Diwali consumer demand. Even if IIP declines in November and December, thanks to the spike in October, the three-month moving average will remain positive. Indranil Sen Gupta, India economist at BofA-ML, says the growth of infrastructure industries has already come off to 1.8 per cent in November from 6.5 per cent in October. However, like many others, he believes industrial data is possibly underestimating industrial production by 200-300 basis points, given the PMI and industrial credit growth figures.
With industrial growth failing to show a secular rebound, economists believe that the Reserve Bank of India is most likely to cut rates. Indranil Pan is expecting a 25 basis points cut in repo rate in January and another 25 basis points in March. For the full year most economists are factoring in a 100 basis points rate cut.