November auto sales already point to slowdown
A fortuitous change in the month Diwali was celebrated this year (November as opposed to October last year), and an unexplained jump in automobile sales in October (perhaps there’s a big inventory build-up at the dealers?) ensured that the IIP grew a dramatic 8.2% in October after having declined 0.7% in September—in the April-October period, IIP was negative for the four months. The 25.9% hike in “motor vehicles, trailers and semi-trailers” in October itself contributed a 1.4 percentage point hike in the manufacturing index’s 9.6% rate of growth, and to a 1 percentage point in the overall IIP. Indeed, sales of commercial vehicles, a lead indicator, have contracted in 7 of the last 9 months. Capital goods, which rose a dramatic 7.5% in October after contracting in each month since April, similarly, contributed around 0.9 percentage points to the manufacturing growth of 9.6%. Whether the October data is an aberration is hard to say, but it’s worth keeping in mind that, in four of the last five quarters, order books of 10 key capital goods companies like L&T, Bhel and Siemens contracted—minus 7% in Q2FY12, minus 9% in Q3FY12, minus 38% in Q4FY12, plus 16% in Q1FY13 and minus 29% in Q2FY13. Sugar production in October, similarly, jumped a massive 95.5%, and this alone added around 1.4 percentage points to the October IIP. In other words, it’s a good idea to hold the champagne since the October IIP jump looks overstated. In all probability, just the base effect alone—October IIP fell 5% in 2011 while November 2011 IIP grew 6%—will lower next month’s IIP. All told, expect IIP to grow at around 1.8-2% in FY13 (it grew 1.2% in April-October) as compared to 2.8% in FY12 and 7.8% in FY11.
The biggest casualty of this, of course, will be the budget where the finance minister Pranab Mukherjee budgeted an aggressive 19.5% growth in gross tax revenues as compared to FY12’s 13.7% rate of growth even though it was obvious that FY13’s GDP growth would be around 5.2-5.3% versus FY11’s 6.5%—as an aside, the 25% increase in excise collections in October should have alerted everyone that the October IIP would be a shocker. Between April and October, overall tax collections grew 14.5% and reached just 43.3% of the budget target. While that’s a proportion not dramatically different from FY12’s 43.9%, let’s keep in mind FY12 saw a tax slippage of over R30,000 crore. The finance ministry is finally getting aggressive about mining its vast reservoir of data. Witness yesterday’s statement by the revenue secretary about having just 1.6 million taxpayers who earn more than R10 lakh a year versus 5.2 million people investing over R2 lakh in mutual funds or bonds of more than R5 lakh—he was warning taxpayers to come clean. This new-found aggression is a good thing. Extracting higher taxes in a slowdown can’t be an easy job.