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IIP surprises: Will Subbu be able to battle inflation in peace now?

By Sourav Majumdar

Reserve Bank of India (RBI) governor Duvvuri Subbarao just got a new number to factor in before he unveils his review of the monetary policy on 18 December.

Surprising most economists and observers on the upside, the latest Index of Industrial Production (IIP) print for October 2012 came in at a healthy 8.2 percent, much higher than most expectations which were in the region of 4.5 percent.

By all accounts, the IIP figure will come as some relief not just to corporate India, which has been under stress as industrial activity and output have fallen, but doubtless also to RBI which has been fending off constant calls for a rate cut, even as inflation remains sticky and well below the central bank's comfort zone.

IIP figure will come as some relief not just to corporate India, which has been under stress as industrial activity and output have fallen, but doubtless also to RBI which has been fending off constant calls for a rate cut, even as inflation remains sticky and well below the central bank's comfort zon. AFP

It is true that the IIP print for October has been aided by the base effect, since the period a year ago had festival related closures of industry and aided this year's number. But even so, the 8.2 percent figure is well above most estimates and that should warm the hearts of policymakers and industry alike. IIP, in fact, contracted 0.7 percent in September, making this rebound look even stronger.

On the other hand, Subbarao is still locked in grim battle on the inflation front, a fact which was reiterated on the same day as when the IIP number came in. The consumer price index (CPI) number for November came in at a high 9.9 percent, indicating that price rise was still the single largest problem facing the country's central bank, days ahead of its next review. The wholesale price index (WPI) number - or headline inflation - will come in on 14 December.

Seen in conjunction, these figures prove Subbarao's thesis that industrial activity, though slow and of concern, still remains a lesser problem than sticky inflation which can throw all calculations off gear. Viewed against the global scenario as well, things are challenging for RBI.

Finance minister Palaniappan Chidambaram has been suggesting that the time is right for a rate cut to spur growth, which came in for the second quarter at just 5.3 percent and added to the concerns of an already beleaguered government. However, observers see some renewed energy on the reform front now that the crucial reform of foreign direct investment (FDI) in retail has passed muster in Parliament. But even so, there are new battles to be fought every day for the government on the policymaking front as several thorny bills come up for debate.

Cutting back to the IIP figure, the good news is the contribution made by manufacturing, which contributes a hefty 76 percent to the overall print. Manufacturing rose a strong 9.6 percent in October, showing that industrial activity was working at a fairly good clip that month.

Corporate India has responded predictably to the numbers, with Venugopal Dhoot, whose Videocon Group has a key consumer-facing consumer durables business.

Dhoot told CNBC-TV18 that November also saw good growth in consumer durables. Economists, though somewhat divided about what RBI will do at its next review, seem to be broadly betting on the fact that a rate cut may not be in the offing just yet, given the RBI's own hints earlier that an easing may begin January 2013.

While most economists feel the central bank may hold on to rates this month and wait until January to effect a rate cut, there is one school, which feels RBI should not be influenced by this IIP number and should, in fact, be cutting rates to spur growth because the larger problem of slow growth remains.

Indranil Pan, chief economist, Kotak Mahindra Bank, is cautious on the latest figure. Says Pan: "The upside was primarily due to festival season demand which was evident in consumer goods production. Consumer durables index increased 10.7 percent month-on-month and consumer non-durables grew 4.1 percent m-o-m. Capital goods production growth turned positive after seven months of contraction, with some help from positive base effects as October production actually contracted on a m-o-m basis. The November IIP likely to drop down to low single-digit in the absence of festive demand."

On RBI action, Pan says: "Overall, I do not think that this number changes the direction of India's growth dynamics. We are likely to see investment revival remaining on the slower side while the consumption side may now be stabilizing. And, this data is unlikely also to change the thought process of the RBI, where we expect any repo rate cut being pushed to January, rather than immediately in December."

However, with CPI at 9.9 percent, this, however, also raises the risk that the rate change may get further pushed back to March 2013, implying that the expected support from the interest rate side to growth could also be missing, he warns. India Inc will surely be watching. But so will Chidambaram. Over to Subbarao, as always.

by Sourav Majumdar

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