AUG IIP - DOES IT MARK A TURNAROUND?

By Research Desk
about 12 years ago

By Ruma Dubey

Better monsoon from July onwards might have gone on to help recoup the numbers for August. But the base effect is also playing up. Yet undoubtedly, demand has picked up and though auto sector was showing a fall in production and sales for a couple of months now, expectations were subdued.

Growth was led by consumer good which grew 5% and consumer durable rose 4%. This surge makes one a little optimistic that monsoon led to buying and improvement in sentiments. This sector is expected to do well in second half too but capital goods could drag.

Have we turned the corner? Not really.  But maybe due to substantial base effect we could see positive numbers. Capital good continues to gyrate sharply. Exports remain weak, infra issues yet to be resolved and unless these issues are resolved we could have such IIP numbers up one month and down the next. To have a sustainable rising IIP number, this even if it happens, could be very small.

Lot of positive sentiments around and despite Infy, there is sense of optimism now, with the Govt also announcing a slew of reforms; though one does not know it they will take off at all or no. The Winter session of the Parliament is expected to remain stormy, marked by walkouts, and Vadra- DLF and petty politics could dominate over all.

Inflation numbers are due on Monday and that, not today’s IIP will decide the way in which RBI will move. 2.7% IIP is better than 0.1% yet it not yet enough to say that we have no worries on the growth front. Will RBI attach much credence to today’s IIP numbers? Well, the basic objective of RBI is to control inflation and that is expected to remain uncomfortably high. So if it keeps its eyes only on inflation, then maybe we need not look forward to any rate cut. But a turn in the mood of the RBI could happen only if RBI feels that the Govt is now onto the reforms track and could do its bit by reducing rates to keep the sentiments buoyant. But that is if and only if, RBI wants to boost sentiments but again, with growth picking up, RBI may feel that the pressure on its to reduce rates have dissipated. Well, Monday inflation numbers will give a better picture.

Another important point is the rupee. If it remains stable around Rs.51 to rs.52 levels, then we could see disinflation benefits coming in and oil subsidy bill will come down thus bringing down fiscal deficit. Now that will be something to really celebrate. But it is a big ‘if’.

Infra projects are stuck at various stages due to lack of various clearances. With the new market savvy FM taking charge, if he can help clear two-three large infra projects, then it will boost the sentiments immensely.  Unless old projects do not get off the ground, how will new projects come up as sentiments remain negative. The Govt needs to facilitate completion or delivery of older projects and that could enthuse the entrepreneurs to take up new projects.  Mr.Chidambaram has come and made a lot of forward looking statements, but one has to wait and see if he actually walks the talk. National Investment Board will be most eagerly awaited proposition and if it goes through, infra sector is sure to boom.

A one per cent interest rate hike affects a company less than a two year delay in project execution due to policy paralysis . Thus to think that RBI, with its tinkering on interest rates will help boost growth is a very misplaced notion. RBI alone, with its interest rates cannot have much impact; it has to work in tandem with the Govt, which as we all know has been comatose. So those who today feel that falling growth is because of RBI alone and they need to lower interest rates to correct it, are just being too naïve.