IIP for Dec’09 at 16.8% YOY.

IIP reaches the mind boggling growth at 16.8%, highest since Nov’94, much above consensus estimate of 12.3%. Month over month IIP increased by an impressive 11%. IIP increased 8.6% during Apr-Dec vs 3.6% previous year. This stellar growth was driven by Manufacturing and base effect (-0.2% in Dec’08).


Manufacturing strong on both yoy and monthly basis:

• Manufacturing output, with higher weightage in IIP, rose by a strong 18.5% yoy. Within manufacturing, as many as 14 out of 17 industry groups showed positive growth. But weakness in food products continued due to bad monsoon. Transport equipment and parts (+82% yoy), machinery and equipment (+45%), metal products and parts (+12%) showed major growth (see table in next page) indicating that construction, infrastructure and auto sectors are driving growth currently.

• Mining grew at 9.5% in Dec compared to 10.4% in Nov. Electricity increased at 5.4% in Dec vs. 1.8% in Nov. On m/m, both Electricity and mining posted positive growth.

Capital Goods improved significantly and Consumer Goods still strong:

o The consumer goods grew at 12% in Dec as consumer durables grew at 46%, the highest ever after more than 20% growth for past 5 months. The non-durables improved and grew at 3.7% yoy (14% over the last month). Consumer durables growth was supported by booming car and white goods sales helped by low financing cost and improving outlook. Also expectation of increased cost after budget is driving car sales in Jan-Feb.

o Intermediate goods remained robust at 21.7% yoy indicating that overall industrial activity will likely remain elevated.

o Capital goods zoomed at 38.8% in Dec. On month over month basis, it increased 41% in Dec. It indicates that growth is becoming more broad-based moving from consumer sectors to capital goods sector. The ECB data for Dec also shows increased borrowing for capital goods imports.

Bottom Line:

o There is no denying the fact that IIP growth was partially helped by low base and policy stimulus. But obviously the positive momentum has gained traction with growth becoming more broad based.

o A higher than expected growth in Industry will offset any decline in Agriculture resulting in a GDP growth in FY10 that has the potential to surprise on the upside.

o RBI has already announced that the policy action is not event driven like budget. So we expect a rate action only in April as WPI inflation peaks, Govt borrowing for FY11 are out and Global scenario becomes clearer.

o Expectation of higher growth and inflation in FY11 will increase nominal GDP expectation next year. So fiscal deficit as % of GDP will be lower in FY11. Tax revenues also go up on better growth prospects. So, net borrowing for FY11 can be expected to be lower than this fiscal.

Thanks,
Nimesh.