Sustained industrial revival to take time: Report

 The Dollar Business Bureau Industrial output growth after running out of steam post 1QFY15 again appears to be gathering momentum. Industrial output grew 5.0% yoy in February 2015 as against negative 2.0% a year ago and 2.8% a month ago. Cumulatively, it has grown 2.8% so far this fiscal as against negative 0.1% during the same period last fiscal. Despite green shoots emerging, rating agency Ind-Ra believes a sustained industrial revival will take a while. A large number of stalled projects have adversely impacted the balance sheets of both public sector banks and corporate sector, particularly of the ones engaged in the infrastructure sector. As a consequence, instead of expanding their balance sheet both are repairing it, leading to a virtuous cycle whereby banks are not lending and private sector is not investing. Reserve Bank of India (RBI) maintained status quo on policy rates in its first bi-monthly monetary policy statement for FY16. Ind-Ra, however, expects RBI to cut the repo rate by 50bp in FY16. Although the reversal in retail inflation trajectory since November 2014 is a concern, the agency believes retail inflation will remain within the glide path of RBI in the near term. It is based on the premise that (i) global commodity prices including crude will remain soft (ii) the minimum support price of food grains will grow slowly in FY16 and (iii) the manufacturing sector will have low pricing power. The retail inflation in February 2015 came in at 5.4 %, a four-month high, mainly due to the high food and beverages inflation. Manufacturing output grew 5.2% yoy in February 2015. Cumulatively, manufacturing has grown 2.2% yoy so far as against the negative 0.7% during the same period last fiscal. 15 of the 22 industry groups in the manufacturing sector grew in February 2015. However, groups including office, accounting & computing machinery (negative 44.6%), radio, TV and communication equipment & apparatus (negative 43.4%) and other transport equipment (negative 8.2%) showed a decline in growth. Considering the weights of different items in the Index of Industrial Production (IIP), the top five items that contributed significantly to manufacturing growth in February 2015 were cable, rubber insulated, apparels, stainless/ alloy steel, electricity, and room air conditioners. After two consecutive months of contraction, mining output grew 2.5% in February 2015. Cumulatively, the sector grew 1.5% yoy growth over April - February FY15. Ind-Ra expects a higher domestic coal output in FY16 due to Coal India Ltd’s better performance and two rounds of successful e-auction of coal blocks. At the broad industrial category, the electricity sector has been an outperformer since FY13. It grew at 5.9% in February 2015, after moderating to 4.8% and 3.3 % in December 2014 and January 2015 from 10.0% in November 2014. Cumulatively, over April - February FY15, it grew at a healthy 9.1%. The growth performance at the use-based industrial category continues to be mixed. The noteworthy feature however is the fourth consecutive month of growth witnessed by the capital goods sector in February 2015 (8.8%). Ind-Ra believes it may still be too early to believe that there is finally a turnaround in investment cycle. Capacity utilisation is still 71.7% according to latest RBI survey. Moreover, the consumer durables sector showed a contraction of 3.4% in February 2015 and cumulatively 13.3% so far in this fiscal. Though worrisome, the contraction in consumer durables is not surprising, given the low consumer sentiment, sustained high inflation in the recent past and high financing costs.  

This article was published on April 13, 2015.