The data on industrial production for November has been a pleasant surprise, but it had absolutely no impact on the stock market. One reason for that is the effect of the accounting fraud at Satyam Computer Services Ltd, which has led to concerns about corporate governance across the board and led to the benchmark index, the Sensex, underperforming other regional markets in the last few days.
The other reason is that a host of indicators do not paint a rosy picture of the economy, in spite of the improvement in the Index of Industrial Production (IIP).
As Tushar Poddar and Pranjul Bhandari of Global ECS Asia Research at Goldman Sachs Group Inc. point out, “Other coincident indicators point towards very weak activity in November. Exports and motor vehicle sales each fell by 10% y-o-y (year-on-year) in November. Tourism revenue, and direct and excise tax collection also slumped. The Purchasing Managers’ Index contracted for the first time in 3.5 years to 45.8 in November from 52.2 in October.” Add to that a deceleration in non-food credit growth during the month, although a part of that was on account of lower credit offtake by the oil companies. Further, according to the Central Electricity Authority, power generation went up by 2.6% y-o-y in November, compared with 3.8% in October. Yet, the IIP was higher in November.
What were the primary reason for growth in manufacturing, which went up from minus 1.1% in October to 2.4% in November? One reason was the huge rise in the index for “rubber, plastic, petroleum and coal products”, which rose 30.7% during the month, compared with a rise of 1.3% for the April-November period. Since Reliance Petroleum Ltd’s refinery started processing crude only at the end of December and it will take time for it to ramp up output, the 30.7% growth in this category is tough to explain.
The other trend during the month was capital goods production growth slipping into negative territory, while consumer non-durables grew strongly. But that’s more on account of the base effect rather than anything else—the capital goods index moved up from 350 in October 2007 to 392 in November 2007, while the consumer non-durables index went up from 245 to 251 during the same period. The higher base affected the growth of the capital goods index. On the other hand, the index for “machinery and equipment other than transport equipment” grew at 5.5% y-o-y.
What of the future? As has been mentioned before in this column, it’s possible that the credit crunch in October affected the economy disproportionately that month and also in November. At the same time, it’s important to remember that between 29 November and 26 December, non-food credit advanced by scheduled commercial banks contracted by Rs79,047 crore. That cannot be good news.
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