10 Takeaways from the IIP numbers for October 2016

The IIP for the month of October 2016 came in sharply lower at -1.9% on a YOY basis. The pressure obviously comes from the manufacturing sector because the core sector has shown good growth in the month of October. What is pertinent is that this refers to the period before the pressure of demonetization started on November 09th. That means IIP numbers may come under further pressure in the months of November and December. The chart below depicts the relationship between IIP, Manufacturing Growth and the Core Sector growth over the last 18 months…


The above chart depicts a very clear and strong positive correlation between manufacturing growth and IIP. However, IIP has been at divergence with the Core Sector growth as the IIP is dependent on the manufacturing sector to the extent of over 75%. In fact, both the IIP and the manufacturing growth have been struggling to stay in positive territory. This raises doubts over the full year IIP that can be achieved for this fiscal as well as the full year GDP number. While Manufacturing is smaller than Services sector in the GDP basket, it is manufacturing that provides the alpha for the GDP. That is the reason IIP becomes so critical!

What are the 10 key takeaways from the IIP numbers for October 2016…

  1. The negative IIP growth rate of (-1.9%) was pushed down by manufacturing and mining. While mining showed negative growth of (-1.1%), manufacturing showed negative growth of (-2.4%). Only electricity showed a positive growth of 1.1% for October 2016.
  1. On a YOY basis, all the three sectors performed worse than October 2015. While mining and manufacturing slipped deeper into negative territory, electricity saw its positive growth taper over the last one year
  1. 12 out of the 22 industry groups in the IIP basket showed negative growth for the month of October 2016. This has approximately been the performance of the advance/decline ratio in the last few months as far as the IIP basket is concerned.
  1. Electrical machinery, office equipment, computing machinery and wood products were among the key sectors that showed a deeply negative growth in IIP for the month of October 2016. These sectors have consistently underperformed the IIP average.
  1. Some of the positive drivers for IIP were sectors like coke, refined petroleum, motor vehicles, trailers and basic metals. Motor vehicles have seen a spurt in demand on the back of the OROP and 7CPC infusion of cash
  1. The concern is that in terms of user-based classification, capital goods continues to be the worst performer with a negative growth of (-29.5%) for the month of Oct 2016. This figure has been consistently below the -20% mark for the past few months.
  1. Among specific products, electrical cables, rubber products and aluminium extrusions saw a negative IIP growth. These are products dependent on industrial demand and a slowdown in industrial demand has been largely responsible for the negative contribution of these products. On the positive side Hot Rolled Coils (HRC) and commercial vehicles contributed to propping up the IIP. HRC output was largely on the back of the favourable Minimum Import Price (MIP) policy followed by the government to support the steel sector. Commercial vehicles demand has been an outcome of good monsoons and a bumper Kharif crop this year.
  1. There is a very important demonetization angle to the entire IIP debate. The impact of demonetization will be felt more acutely in the months of November and December when the data comes out in the coming months. The pressure is already being felt by the SME and rural sector and that is likely to spread to the industry at large.
  1. What will be the impact of IIP on the repo rates and the RBI monetary stance? Normally low IIP is a basket case for cutting interest rates. Technically, this will make funds available to industry at lower cost and that will help push up production. But the major challenge currently is that industry is already operating at 70% capacity utilization. That means the real problem is insufficiency of demand. Unless the demand picks up, it is hard to envisage companies investing more and increasing production. Hence IIP is likely to remain subdued. This may dissuade the RBI from cutting repo rates as it is unlikely to translate into higher bank lending and higher output. That thinking was already visible in the monetary policy of December 07th.
  1. Lastly, what do these IIP numbers hold for the full year IIP and the full year GDP? At the current pace, the full year IIP will be just around 2-3%. This will mean that sustaining 7.5% GDP growth will be extremely difficult. The recent RBI policy has already downsized the GVA for the full year 2016-17 to 7.1%, nearly 50 bps lower than their previous estimates. Goldman Sachs is already projecting GDP for 2016-17 at just 6.3%. It will be interesting to see how capital flows into India will react if that growth advantage over China narrows substantially. That could be the big challenge posed by the IIP number!

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