The market's initial reaction to the release of the March 2013 Index of Industrial Production (IIP) numbers has been mild approval. The quick estimates (QE) will go through two rounds of revision and the historical record suggests those could mean large changes. Hence, there's need for caution.
However, if the QE can be trusted, the IIP's movement suggests the economy has bottomed out and could be gradually moving into revival mode. The index hit 192 points in March, up sharply over February (176) and also up by over 2.5 per cent over March 2012 (187.6). This suggests the IIP grew by about one per cent in 2012-13 over 2011-12. That's a far cry from the trend growth rate of about nine per cent between 2005-06 and 2010-11 but at least, it is positive.
March is historically prone to big spikes in the IIP. This is a reporting quirk. Much of the year's production is "backloaded" onto March, as it's the last month of the financial year. Sometimes there is also a surge in spending in specific sectors in March. This is especially true if the Budget has hiked taxes or excise duties for the next financial year, triggering an attempt to stockpile before the rise comes into force.
Another point, sobering and worthy of note, is that the March IIP is actually lower than the March 2011 IIP (193.1), despite the apparent recovery. That little data point shows just how much ground the economy has lost in the past two financial years.
In terms of sectoral breakups, mining lost ground last financial year versus 2011-12 (down 2.5 per cent), electricity generation (+four per cent) gained a bit, and manufacturing more or less stagnated (+1.2 per cent). In terms of use-based indices, capital goods showed a jump of 6.9 per cent in March over March 2012. This could indicate some recovery in industrial investments.
Consumer durables collapsed, going down 4.5 per cent. This indicates negative sales in refrigerators, washing machine, furniture, etc, and it gels with automobile sales data, which showed a negative trend in March (and in April). Essentially big-ticket discretionary spending has disappeared. On the manufacturing side, shipping industry analysts will not be surprised when they learn ship-building and repairs shrunk 30 per cent in FY13. Shipping is going through the worst phase in living memory.
Taken together, various bits of macro-economic data indicates a slow recovery, with some positive developments on various fronts. Although exports fell in 2012-13, Q4 saw positive export growth. Wholesale price inflation dropped below six per cent, allowing RBI to cut interest rates again - the central bank has eased the repurchase rate by a cumulative 75 basis points in calendar 2013. Lower crude and gold prices could take some pressure off imports. The IIP has delivered a small positive surprise. One major fly in the ointment is double-digit consumer inflation, driven largely by rising food prices. A normal monsoon could help.
The IIP numbers will be followed next week by inflation data. The market will respond positively if that also shows improvement.
The Nifty closed on Friday at 6,095, just a little below the 52-week high of 6,111 in late January. It is the highest closing value recorded in over two years. A move past 6,111 would confirm the bull market still has positive momentum. This looks extremely likely at the moment, unless there is a negative inflation surprise.
The fly in the ointment could really be political controversy. The government's habit of stumbling from one scam into another has, thus far, been ignored by the foreign institutional investors currently the only bulk equity buyers in the Indian market. But elections are drawing closer and the shadow of political instability could trigger sell-offs.
