Given the 8.7% fall in commercial vehicles in Q4FY13, the 11.5% contraction in passenger vehicles and the index of eight core industries falling 2.5% in February, it's difficult to believe that February’s index of industrial production (IIP) rose 0.6%—even if you believe it though, April-February FY13 IIP rose just 0.9% versus 3.5% in the same period in FY12. If you discount the dramatic 9.5% y-o-y growth in February capital goods production—this is only the second positive reading in the last 12 months—IIP turns out to have contracted by 2.3% in February, a number that looks quite in line with consensus estimates as well as the trend seen in other indices such as the PMI. Keep in mind that the reason why the February 2013 capital goods growth number looks a bit iffy is that February 2012 was also an unusually high base with y-o-y growth of 10.5% in comparison with minus 2.7% in January 2012 and minus 20.1% in March 2012.
Much of the increased capital goods index growth, of course, seems real if you look at the 91.3% growth in provisional Q4 q-o-q sales of Bhel (it fell a marginal 0.3% yoy) and the equally dramatic 14.8 times hike in Q4 q-o-q order books (3.1 times y-o-y). Bhel's provisional report explains the jump in terms of some orders—that for the 2x800 MW Gadarwara project—materialising before schedule. It would be a good idea, however, to wait for Q4 sales/order book data from other engineering firms like L&T over the next few weeks because the investment numbers coming from what’s happening on project starts or even projects getting completed don’t support this spurt in growth hypothesis. But even if you assume the Bhel (and capital goods numbers) hold, the capital goods sub-index will still have contracted 7.6% in April-February FY13, making it critical that the Cabinet Committee on Investments (CCI) continue to clear the R8 lakh crore worth of stalled projects, and that RBI help improve the investment climate by lowering the CRR to improve monetary transmission.
Indeed, the fact that mining and electricity (together they have a 25% weight in the IIP) fell 8.1% and 3.2%, respectively, also points to the same thing—CCI needs to push environment clearances for coal mines, and the government needs to follow up on critical assurances like (a) getting the SEB restructuring package through since this will clear up the choked payments flow in the system and (b) clearing a coal price pooling mechanism without which a very large number of power plants are finding it impossible to generate electricity at anywhere near capacity. Given that the current bout of contracting IIP really began in March 2012—it contracted 2.8% in that month—the good news is that, on a purely base effect, March 2013 IIP numbers will look a bit better than those in February.