Infalation at 12.10% IIP numbers excepted to be positive

GYoY, the GDP growth for the month of July ‘08 dipped from 8.3% to 7.1% but the market celebrated this news with a spurt of gain and started recouping the losses it had posted in the morning session. Why did the glass look half full for the markets?

Firstly, the IIP growth figure was expected to be lower than the June growth rate and the average estimate was around 6.25% to 6.5% but when it surged above 7%, naturally, there was a reason to celebrate. Sequentially, the growth has also gone up from 5.4% in June ‘08. So this too added on to the optimism.

Another major reason for rejoicing was the massive surge in the capital goods sector. This sector which has been listless, showed a growth at 21.9% as against 12.3% in July ‘07. Growth in the capital good sector is very good news as this means that investment activity continues to remain strong.

What also added on to the growth was the rise in consumer durables growth, which YoY, grew from a retraction of 2.7% to a positive 11.2%. But industry experts warn that there is no need to be jubilant over this growth as 41% of these consumer durable goods comprised of 10 articles which are completely irrelevant, questioning the very veracity of the IIP compilation.

Manufacturing which accounts for about 80% of India’s production, on a MoM gained 7.5% from 6.1% but YoY, it fell from 8.8%.Electricity output fell 4.5% from 7.5% in July ‘07. Mining grew 5% from 3.2% YoY. Consumer-goods production increased marginally from 7.1% to 7.3%.

With inflation seemed to have been reigned in, crude prices falling and given these IIP figures, all point to the fact that India Inc is now on the revival path. There is no doubt that first quarter of the current fiscal was the most challenging in recent times, with high crude prices, higher interest rates and lower demand. Corporate profitability is expected to increase from the second half of the current fiscal and this is based on the big assumption that retail demand would pick up. And why would retail demand pick up? The govt has recently given an average 21% pay hike to about 5 million government employees, which is the highest hike in the entire Asia-Pacific region. This means that there would be more disposable income with these many people and with this money coming in exactly during the festival time, demand is sure to pick up. Once demand picks up, industrial production would rise, that is the simple economic co-relation.

So now that growth is showing signs of revival and inflation seems to be stabilizing, should we say that RBI would now go slow on any more tightening? Right now, at least for the immediate 2-3 months, there is no case for tightening money supply or hiking interest rates. And later, if crude once again starts rising, it is expected that, at the most, there could be a 25 bps rate hike, but this again is based on the assumption of crude shooting up. If things remain as they are right now, it is unlikely that interest rates could be tightened any more.

For now, when the demand is low, the industry should concentrate on boosting growth. There is no doubt, in the coming days, inflation rate and crude price would continue to dominate. For now, things look good, so best to enjoy the moment.