What The IIP Freefall Suggests For GDP Growth In Q2

India’s industrial production output in September fell the most in nearly eight years, stoking concerns that the economic growth will slow even further from a six-year low.

The Index of Industrial Production contracted by 4.3 percent in September 2019 over last year compared to a contraction of 1.1 percent in August. The fall in industrial output is the steepest since October 2011, show historical data available.

The weakness in India’s factory output was widespread, with all three industrial sub-segments showing a contraction.

Economists didn’t expect such a sharp contraction. And the latest reading is giving them reasons to be wary of the upcoming GDP numbers for the July-September quarter.

“We expect Q2GDP growth at 4.2 percent,” said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, in a report.

“Our acceleration rate for 33 leading indicators at 85 percent in October 2018 is down to just 17 percent in September 2019, with such decline gaining traction from March 2019. Even IIP growth number for Sept.19 was –4.3 percent, which is quite alarming.”

Here’s what Ghosh and other economists had to say about the September IIP numbers:

Nomura

• The IIP contraction all but confirms a growth slump in the July-September quarter.
• Contraction in infrastructure and construction goods reflects weak investment activity.
• The print suggests that a festive boost was largely absent, and the next IIP reading could see a sharper fall due to an unfavourable base.
• This will likely result in a deeper trough and a prolonged phase of bottoming out of the growth cycle.

IDFC First Bank

• Capital goods and consumer durables contraction was led by a fall in commercial vehicle production.
• Latest IIP print confirms that growth impulses are slowing, as indicated by other high-frequency indicators.
• Weakness is across consumption-oriented sectors as well as investment.
• Slowdown is a reflection of weak rural and urban demand.
• Rural demand weakness is due to adverse terms of trade for agriculture, while urban demand weakness is due to the liquidity crunch for NBFC, who have been the key lenders in consumer durable spaces.
• Slow growth in exports indicates the slack in global growth and reinforces the domestic demand slowdown.
• It appears difficult for growth to ramp up significantly in second half of FY20 due to weak consumption sentiment and continued deleveraging by both lenders and borrowers.

Axis Bank

• September IIP was the weakest in the current series that has 2011 as its base year.
• The reading was exacerbated due to rain-related one-off events that led to major contraction in a few items.
• However, even after removing anomalies other internals remained weak.
• IIP has now also contracted on a three-month basis, the first time since 2012.
• Intermediate goods were the only category in expansion, but if mild steel slabs are excluded, then that too will be in negative territory.
• Capital goods production is now in freefall.
• Only 30 percent of the sectors are expanding while the rest remain in contraction.

India Ratings and Research

• IIP growth has been very volatile and the small momentum of couple of months fizzles out soon.
• Economy is facing a structural slowdown from falling household savings and low agriculture growth.
• Low agriculture growth is then fed into low wage growth in rural areas and impacting rural demand adversely.
• Expect further rate cuts in the December monetary policy.

SBI Research

• IIP contraction is quite alarming.

• However, the overall growth slowdown should be looked through the prsm of a synchronised global slowdown.
• Expect larger cuts by the monetary policy committee in the December policy, but it wouldn't lead to any immediate material revival.
• It is imperative that the government adheres to no policy surprises in sectors like telecom, power and NBFCs.
• Expect GDP growth to bounce back from FY21.