IIP @ 7%: Has RBI dumped growth to contain inflation?

April Index of Industrial Production data has come out at 7% versus 11.3% YoY. March IIP numbers have been revised to 3.9% vs 3% earlier. CNBC-TV18 poll predicted the IIP number at 6.4%. The April manufacturing growth came at 7.5% vs 12.4% YoY.

After IIP growth numbers were released, experts were positive on the numbers but don't see growth moving up. Shubhada Rao of Yes Bank is not optimistic about the continuation of growth. On the other hand, David Carr, Standard Chartered Bank feels that the government is focusing more on inflation control rather than growth.

Although Rao is slightly optimistic on the IIP front. She said, “We were at about 6.5% on the forecast ourselves, so anything above that is clearly a pleasant surprise.” She sees FY09 GDP growth at 7.5-8%.

Expectations were getting anchored aggressively because of the repo rate hike. It also gave a clue that perhaps growth wasn’t all too bad that was being broadly expected. She said, “Our 8% forecast although may look for a somewhat downward revision, but the initial cues are fairly encouraging if you look at not just IIP but overall services growth. Rail freight has been growing at 21% as well as transport and communication. So all said done, auto sales are good in May they have been even better than April, so as of now there is no visible evidence that the growth momentum is on a complete slowdown."

On GDP numbers, Soumendra K Dash of CARE feels that 8% is fairly possible because though RBI has taken a lot of a monetary stance which has really curtailed that money supply growth. The rate of interest is increasing and money is becoming expensive, GDP will touch 8% and if not then 9.5%, he added.

HDFC Bank does not rule out CRR hike if July liquidity goes up. The view is that there is no crisis in growth and RBI is giving priority to inflation.

ICICI Securities view on this is that the momentum in economy is stronger than anticipated. Further move by RBI before July-end is unlikely. On the other hand, BNP Paribas sees 25 bps CRR hike before RBI july policy.

Naval Bir Kumar, MD of IDFC Asset Management said, “It is definitely better than the 3.9% revised number for March. But having said that, it is still significantly lower than last April's growth numbers. Somewhere towards 2003-end, we saw an increasing trend of growth and over the last eight months, we are visibly seeing a slowing trend of growth.”

According to Bir Kumar, inflation has been a concern in India for the last few months, but the indication from RBI so far was that they are trying to balance growth with inflation. Hence, RBI targeted liquidity management rather than tampering with interest rates in the economy. The increasing interest rates seem to indicate that they are now biased more towards inflation and that’s become a worry for them, rather than trying to also manage growth at the same time, he added.

This has been a trend, for not only India, but one will see a rate hike every time one sees high inflation and rising interest rate environments. Fed has also indicated that the next move may be up. Bir Kumar does expect GDP growth numbers to be under stress with higher interest rates.

Bir Kumar explains that the government has said that nearly two-thirds of infrastructure spending will be done by the public sector. Therefore, in a deteriorating fiscal situation for the Government of India, which seems to be very visible in 2009, same level of infrastructure spending will not be there. This increases the cost to the economy and reduces demand in the economy because investment spending comes down. Therefore, according to him, these are all domino effects that will happen. He said an analysis of the data over the next few months will be done.

Looking forward...

Dash of CARE senses smugness in the envelope of the corporate world. He feels that IIP may grow at 7% probably because of the lower base year effect. If you see that in April and March 2007, there is a drastic fall in the index by slightly above 15% but the momentum may not continue in future, he added.

Rao believes that the overall macro-economic environment is not exactly conducive to be extremely optimistic that this growth momentum will continue going forward. We do see dips and impacts of a repo rate hike and the money supply still at 22.5%. She said, “We can’t say that we are done with monetary tightening; we still possibly have some more in store for us. It all boils down towards oil and the way we take our inflationary expectations. We are yet to see a full blow out of the second order impact of current inflationary pressures. The RBI has pre-empted on that point of view also. So, growth possibly can get moderated going a little bit ahead.”