ITíS NOT THE BOTTOM, YET

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Summary* PMI contracts for first time since March í09 * Brokerages slash GDP forecasts

India's manufacturing PMI for August contracted for the first time in four and a half years, dipping to 48.5, suggesting Indian industry might be in deeper trouble than perceived and unlikely to have bottomed out. Given how India Inc is low on confidence as the government dithers on reforms, analysts are now forecasting a GDP growth of anywhere between 3.7% and 4.7% in FY14, with the governmentís estimate of 5.5% now looking wildly optimistic. While CLSA has pared its GDP growth estimate for FY14 to 4.2%, BNP Paribas is the least optimistic with a forecast of 3.7%; Standard Chartered Bank believes GDP will clock 4.7%. Most brokerages were earlier predicting the economy would grow at over 5%.

With interest rates likely to remain elevated as the Reserve Bank of India (RBI) leaves liquidity tight in its fight against the falling rupee, Indian industry could see more pain in the months ahead. The impact of any structural reform, in the form of concrete investments, is likely to seen only in the last quarter of the fiscal; currently, both corporates and consumers remain cautious about spends.

ďGrowth is likely to slow further as the RBI will need to keep liquidity tightening measures in place and heightened macroeconomic uncertainty dampens domestic demand,Ē Leif Eskesen, chief economist at HSBC Global Research, observed in a note.

In evidence that demand remains anaemic, showing no signs of revival, sales volumes of commercial vehicles (CVs) at Ashok Leyland fell 24% year-on-year in August while at Tata Motors they came off by 26.5% y-o-y; at Mahindra and Mahindra (M&M), volumes dipped 18% y-o-y. The continuing ban on iron ore mining and shortage of coal threaten to disrupt production of steel and power while high crude oil prices will add to raw material costs.

In other data, cement output rose by just 0.8% y-o-y in July while construction activity remained slow ó construction sector growth for Q1 FY14 was 2.8%, the lowest since Q3 FY09. In an environment where upside risks to inflation persist thanks to a weakening currency, earnings this year for the 30 Sensex companies are expected

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