India: Disappointing February IIP dampens recovery prospects

  • February IIP disappointed sharply at -1.9% YoY (our expectation: 0.5% YoY), belying any expectation of a tepid turnaround in the industrial sector
  • Drag from manufacturing, consumer and capital goods was significant and contraction in consumer non durables is worrying, implying muted consumption demand
  • Muted performance in IIP to continue through FY2014 and possibly for H1 of FY2015 as well and poses downside risk to the Government’s GDP estimate for FY2014


February IIP disappoints; posts a nine month low print

Industrial production for February notched -1.9% YoY despite a sharp uptick in the core sector print (4.5% YoY). However, the January number has been revised upward to 0.8% YoY from 0.1% YoY earlier. April-February industrial production has contracted by 0.1% YoY.


Manufacturing drag worsens; mining and electricity hold their own

contraction has also accelerated as compared to January and the sequential momentum contracted in February after two months of positive prints. Bleak manufacturing activity is also being reflected in the weakness in exports growth seen over the last few months. Within manufacturing, 13 out of the 22 industries have shown negative growth.

The mining sector however seems to have turned the corner and postedpositive growth for the fourth consecutive month. The electricity sector remains the saving grace and posted a stellar growth of 11.5% YoY, which was expected as per the core sector outcome.


Consumer sector remains in the doldrums

Consumer goods registered negative growth for the 5th consecutive month and the continued contraction in consumer durables was on expected lines given the weakness in components such as passenger vehicles. However, the contraction in consumer non durables (-1.2% YoY; prior 4.6% YoY) isworrying as it implies consumer demand is yet to show any traction in the economy.

Capital goods sector continues to languish in negative territory and is reflective of the subdued capex cycle in the economy, which is only likely to recover substantially in the second half of FY2015 as business sentiment improves. This component contracted sharply by 17.4% YoY although someof it is also attributable to adverse base effect.

Intermediate goods have continued to register steady growth throughout theyear. Basic goods performed well and printed 3.9% YoY in February and were in line with the trend seen in the core index performance.


IIP to stay muted; downside risks to GDP have increased

The sharp contraction in the February print does not bode well for recovery prospects for the economy in the near term. The continued contraction in manufacturing and capital goods leads us to believe that a sustained pick up in investment growth is still some way off. We are also unlikely to see any sharp improvement in industrial growth in March 2014 and there are downside risks to the Government’s GDP estimate of 4.9% YoY for FY2014.