December IIP suggests CSO may have got it right
With manufacturing contracting for the second month in a row in December—it has contracted for 5 out of the year’s 9 months to December—even a more than doubling of electricity growth over November couldn’t save the IIP, and this contracted 0.6% in December. And that’s on top of a 0.8% contraction the previous month. This means, in the first 9 months of FY13, IIP has grown just 0.7% or less than a fifth the 3.7% in the same period last year. Though it is incorrect to compare data for manufacturing in the IIP series with data for manufacturing in the advance GDP estimates put out last week—IIP measures production while GDP measures value-addition—the collapse of the IIP series suggests meeting even the 5% GDP target the CSO has estimated is likely to be at risk unless there is a sharp pick up in growth over January to March. This could, of course, happen since January 2012 had a lower manufacturing growth than December 2011 and March 2012 actually saw a negative growth—that means in 2 of the next 3 months, chances of the IIP growing faster are good.
No meaningful growth, however, can take place unless there is a massive jump in the number of projects cleared through the Cabinet Committee on Investments (CCI) process. The value of stalled projects in the first 9 months of FY13 was up to R8 lakh crore, up around 3 times since FY10; the number of new projects announced are down to lows last seen in FY05. The same picture can be seen from the muted—just 7% on a year-to-date basis in FY13—growth in the amount of loans being disbursed by banks. But were some big projects to be cleared—lack of clearances for mining coal mean 43,000 MW of power projects expected to come on stream by FY16 won’t be able to function at more than 40% capacity—the situation could change quickly. Apart from the fillip it will give to mining, which contracted 4% in December, it will change the fortune of capital goods firms or those of firms making commercial vehicles. Tata Motors, for instance, saw a 29% yoy fall in sales of medium and heavy commercial vehicles in the April-December period of FY13; order books for engineering firm BHEL fell 22% yoy in the December quarter—the capital goods sub-index fell more than 10% in April-December. Rate cuts by RBI can help stem the decline a bit—automobile sales, for instance, will rise—but with investments grinding to a halt, consumer sentiment is naturally muted. CSO’s advance estimates for FY13 pencil in a halving of consumption growth, from 8% in FY12 to a likely 4% in FY13. All eyes are on the CCI. And if that doesn’t deliver, it means the CSO—whose estimates have been publicly rubbished by many in the government—may well have the last laugh.