India better, but not great: HSBC

Industrial production came in better than expected, but growth remains low and the investment cycle weak, HSBC Global Research says

March 13, 2014 10:07 IST | India Infoline News Service
January industrial production came in better than expected as manufacturing output declined by less, but growth remains weak at just 0.1% y-o-y. By use, the improvement was led by a smaller contraction in consumer goods production. Of concern, however, capital goods production declined further, which is testament to the weak investment cycle.
Meanwhile, CPI inflation eased in February driven primarily by a further decline in food inflation. The still lacklustre growth backdrop and easing headline inflation may compel the RBI to pause in April, but the tightening cycle may still not be over.
- Factory output improved in January (0.1% y-o-y vs. -0.2% y-o-y in December). This was better than consensus and our estimates of -0.9% and -1.1%, respectively.
- In sequential terms, however, industrial production expanded 1.5% m-o-m sa after being flat in December.
- By industry groups, manufacturing output declined by less (-0.7% y-o-y vs. -1.2% in December), mining output grew at a steady pace (0.7% y-o-y vs. 0.7% in December) and electricity production decelerated (6.5% y-o-y vs. 7.5% in December).
- By use, consumer goods drove the improvement, although it is still declining in annual terms (-0.6% y-o-y vs. -4.7% in December). Within the consumer goods segment, consumer durables (-8.3% y-o-y vs. -16.1% in December) are still plunging, albeit by less. The production of consumer non-durables, on the other hand, accelerated (4.4% y-o-y vs. 2.5% in December).
- Meanwhile, capital goods weakened further (-4.2% y-o-y vs. -2.5% in December), basic goods (0.9% y-o-y vs. 2.5% in December) barely grew in annual terms and intermediate goods (3.4% y-o-y vs. 4.9% in December) slowed.
- Turning to inflation, CPI eased to 8.1% y-o-y in February (vs. 8.8% in January). This was slightly above our forecast of 8.0%, but below the consensus forecast of 8.3%.
- The deceleration continues to be driven by vegetables (14% y-o-y vs. 21.9% in January). Consequently, inflation in food which carries 49.7% weight in the CPI basket, eased to 8.6% y-o-y 9vs. 9.9% in January0. Meanwhile, fuel price inflation slowed to 6.1% y-o-y (vs. 6.5% in January).
- Core CPI (ex food and fuel) inflation also moderated, but only marginally to 7.9% (vs. 8.1% in January0. Within core CPI, inflation in transport & communication', 'recreation' and 'others' weakened, whereas 'education' and 'household requisites' pulled in the other direction.
The headline industrial production and CPI numbers certainly moved in the right direction, and they add to the string of positive data releases seen in recent weeks, with PMIs improving and the current account deficit narrowing further.
Overall, however, there was not that much to cheer about. Why? While industrial production improved, output is barely growing. Moreover, the continued tumbling of investments is a big concern given that a sustained recovery in GDP growth is contingent on a turnaround in the investment cycle. We have not yet seen any signs of that.
An investment-led recovery has to be driven by stepped up implementation of structural reforms and execution of the investment projects that have now been cleared on paper. Bringing inflation under control and delivering on fiscal consolidation may hold back growth in the near term, but is also a pre-condition for a subsequent recovery. While we believe a recovery is in the cards next fiscal year, it is likely to prove protracted with growth currently pencilled in at 5.3% y-o-y.
Moreover, this recovery assumes that the necessary macroeconomic adjustment and structural policy measures are introduced without undue delays. Whether that will happen depends importantly on the upcoming elections and the extent to which the elected government gets a clear mandate, which at this stage is far from given. If a clear mandate is not secured, it could prove more difficult to move policies forward in a timely manner and that would hold back the recovery.
On the inflation front, concerns also remain. The decline in headline inflation in February and over the past few months has primarily been driven by the normalization of food supplies. The marginal easing of core inflation in February was encouraging, but it is just one observation and that does not constitute a trend. Moreover, core inflation remains uncomfortably high.
Looking ahead, on-going adjustments in administered fuel prices and lingering costs pressures due to supply constraints are likely to keep core inflation relatively steady around current levels. However, the dip in headline inflation and stabilization in core inflation may keep the RBI on hold in April.
Industrial production came in better than expected, but growth remains low and the investment cycle weak. CPI inflation eased further led by a moderation in food inflation. Core inflation also eased, but only marginally. While this may keep RBI on hold in April, it is not given that the tightening cycle is over.

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