The stock market brushed aside the dismal industrial production data on Tuesday, with the Sensex rallying 475 points despite a 2.3% drop in the Index of Industrial Production (IIP) in March.
If ignoring bad news is an indication of bullishness, then Tuesday’s stock market action is certainly heartening. Brokers said, however, that the market rallied on hopes that the election results would lead to an NDA (the Bharatiya Janata Party-led National Democratic Alliance) government at the Centre.
Most analysts declined to read anything dire in the March IIP numbers, preferring instead to put a positive spin on them. The most common one was that the March data indicated a bottom.
That’s probably because the ABN Amro Purchasing Managers’ Index for manufacturing saw its first expansion since September in April. They’re hoping that the IIP numbers too will reflect this trend. Economists also held the base effect responsible for the drop in the March IIP, particularly for the fall in the capital goods index.
Several of them also pointed to bizarre trends thrown up in the data, such as the 36% contraction in the output of food products. A. Prasanna, economist with ICICI Securities Ltd, pointed out that keeping food products out of the picture, manufacturing had actually gone up by 0.2%.
He also said that while the sales numbers had started improving, that was due to some extent to destocking or the running down of inventories. In time, though, sales growth would lead to higher production. The strength in electricity production (up 6.3% in March) was also taken as an indication of rising demand in the economy. And finally, analysts also pointed to the upward revision in the February IIP numbers and said that the same would happen to the March data as well. ABN Amro economist Gaurav Kapur said the IIP data contained little new information and was more or less factored into the market.
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But the continuing negative IIP numbers in March underline the weakness of the recovery currently in progress. As a note by Goldman Sachs economists Tushar Poddar and Pranjul Bhandari points out, the seasonally adjusted monthly momentum fell 1.4% in March, after two months of positive momentum in January and February. HSBC economist Robert Prior-Wandesforde writes, “The best survey-based measure of GDP (gross domestic product) growth we can find is the Dun and Bradstreet ‘all sectors’ composite index, which suggests that activity will weaken in calendar Q1 and remain soft in Q2.” Capital goods, in particular, should continue to be weak, given the excess capacity built up in many industries.
Also, the March data showed that of the 17 broad industry groups that make up IIP, only five posted growth year-on-year. That’s down from eight industry groups that showed growth in February. Citigroupeconomist Rohini Malkani points out that “with cumulative data for FY09 at 2.4%; we are likely to see a downward revision to the CSO’s (Central Statistical Organisation) FY09 estimate…, which factored in industry growth at 4.8%”.
Graphic by Sandeep Bhatnagar / Mint
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