The uptick in capital goods output growth has been driven by the volatile rubber-insulated cables category. Excluding this, capital goods output growth continues to contract. Intermediate goods demand also remains weak, Nomura believes
India’s industrial production (IP) growth rose to 2.5% y-o-y in March from a downwardly revised 0.5% in February, in line with expectations (Consensus: 2.4%; Nomura: 3.5%). On a seasonally adjusted basis, it is estimated that IP contracted by around 1.6% m-o-m in March, reversing a 1.3% expansion in February. Plugging in the latest IP reading Q1 CY13 GDP growth is estimated at 4.7% y-o-y (4.5% in Q4 2012). These observations were made by Nomura in its research note.
IP growth in March was largely due to base effects. The underlying momentum has weakened and the pickup is not broad based, the brokerage noted. The uptick in capital goods output growth has been driven by the volatile rubber-insulated cables category (up 247% y-o-y). Excluding this, capital goods output growth continues to contract. Intermediate goods demand also remains weak, Nomura believes.
According to Nomura, IP growth has been bottoming out for over a year now and with base effects turning positive, a slight rise in y-o-y growth rates will not be surprising. However, a real recovery remains elusive as of now. The brokerage is comfortable with its below-consensus real GDP growth forecast of 5.6% y-o-y in FY14 (Consensus: 6.0%) versus 4.9% in FY13.
Key takeaways from the March IP growth
Capital goods in positive territory but due to rogue item: Capital goods output growth remained in positive territory for the second consecutive month. But a detailed look suggests that this is due to the volatile rubber-insulated cables category (247% y-o-y in March up from 189% in February). Excluding this, the underlying trend in IP seems to remain weak, suggesting that the pickup in IP is not broad based.
Supply-side bottlenecks still persist: According to Nomura, the growth in mining and electricity output remains sub-par as policy issues pertaining to these two sectors are still unresolved. This suggests that part of the slowdown in production is due to supply constraints.
Consumer demand remains weak: Consumer durable output contracted for the fourth month in a row, indicating that consumer discretionary demand remains weak likely due to a sharp cutback in government spending, a bleaker income outlook and deteriorating consumer confidence.
Weak growth in intermediate goods (-0.2% y-o-y in March), which is leading indicator for final demand, suggests that final demand remains subdued.
IP growth has been bottoming out for over a year now and with base effects turning positive, a slight rise in y-o-y growth will not be surprising. However, there is still no sign of either domestic demand or external demand starting to accelerate. Leading indicators of the industrial cycle, such as intermediate goods output growth and commercial vehicle production, all suggest that the worst in terms of y-o-y growth may be behind us, but a recovery remains elusive as of now. “We remain comfortable with our below-consensus real GDP growth forecast of 5.6% y-o-y in FY14 (Consensus: 6.0%) versus 4.9% in FY13,” said Nomura in its concluding remark.