JUNE IIP - NEGATIVE BUT CHIDAMBARAM RAISES HOPE

By Research Desk
about 12 years ago

By Ruma Dubey

A negative IIP for June took everyone by shock but the markets decided to shrug this off and look ahead, hoping that the new FM, Chidambaram, will surely announce a slew of measures soon.

Mining, for the first time in a long time, has shown a positive. And electricity has done better though and the best growth, like in May, was consumer durables. Capital goods remain volatile and does not give credibility to the figures. If there had been one major project delivery that, maybe gives a much skewed picture, which is why we see such volatility.

Does that mean one should steer clear of capital goods stocks? Not really because if one looks at the companies, individually, many companies have reported having received orders and the long term story, seems to look good. Thus in this scenario one should go by individual companies and invest based on the fundamentals.  

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 ill 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.

Some of the important items showing high negative growth during June over the same month in previous year include ‘Cable, Rubber Insulated -82.0%, Sugar-66.1%, Sponge Iron-17.2%, Fruit Pulp-22.4%, Three-Wheelers-29.4%, Di Ammonium Phosphate -54.1%, Cement Machinery-40.0% and Colour TV Picture tubes -79.7%.  And some of the items showing high positive growth are: Aerated Waters & Soft Drinks (58.3%), Biaxially Oriented Polypropylene (BOPP)Film (35.1%), Petroleum Coke (70.8%) and Woollen Carpets(61.5%).

Monsoon is sure to have an impact on the demand curve. Food inflation will remain high and going forward, rural demand will take a beating and this could affect consumer goods and non-durable indices in the coming months.

This poor IIP number puts the onus on the Govt, indicating the urgency with which they now need to act. FIIs continue to invest in India and if the FM, as promised, will do away with GAAR and the retrospective taxes, that alone will improve sentiments.

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. RBI is doing the perfect thing by taking a backseat and putting the onus entirely on the Govt. RBI has done what it could do and clearly, unless the Govt acts, it will not do anything more.