The IIP growth of 2.7% for November comes as a bit of a shock given that the consensus number was closer to 6%. Indeed, the impact of festival demand in October, the fewer working days as also lower core sector growth of just 2.3%, would surely have been pencilled in. If we are to see positive IIP growth in December, then the increase over November would have be close to 10%, which admittedly, at this point in time, appears to be a bit of a challenge. On a month-on-month seasonally adjusted basis, growth for November was a negative 3.6%, compared with 4.4% in October.
What?s heartening, this time around, is that the capital goods segment has grown at 12.6%; the fact that companies haven?t been adding enough capacity, other than in sectors such as power, has been worrying economists.
However, as has been pointed out while engineering companies have their order books full, not too many projects have got off the ground. Also, while the data has been volatile, it?s surely not comforting to hear that the consumer non-durables piece, which has a high weightage in the IIP, is seeing negative growth, given that this segment doesn?t have too much to do with the festive season. Clearly, inflation is beginning to take a toll on routine consumer spends.
There are of course, three months before the year ends and while the base effect is particularly high in December, there is some cushioning thereafter. So, as Samiran Chakraborty at Standard Chartered Bank points out, if IIP averages 5-6% for the remaining three months of 2010-11, we?re home. But the macroeconomic environment has already turned less friendly and given that the Reserve Bank of India has little choice but to hike rates, later this month, it can only become unfriendlier. Indeed, bankers are pretty sure that both corporates and individuals will soon be paying more for loans, unless they take a hit on their margins.
Worse still, borrowings will taper off as demand recedes. The weakening macro environment ? in which commodity prices continue to rise ? could soon start to tell on company profits. For a company like Tata Motors, standalone earnings growth is now pegged at just 7% for 2011-12 driven by slower volume growth in trucks and escalating prices of steel and rubbber. Steel majors like Tata Steel have actually reported a sequential fall in volumes. If prices of key raw materials such as steel or crude oil sustain, earnings downgrades could kick off sooner than expected. As of now, Sensex earnings for 2011-12 are expected to grow at 19% but unless costs come off and execution improves, even this number, which is a significant moderation over the earnings of 2010-11, may not come through.
Analysts have pointed out that earnings are at risk for sectors such as refining and petrochemicals. While lower earnings expectations would cause some amount of de-rating of the market, what would really hurt the sentiment is a prolonged period of high inflation and therefore, high interest rates. The central bank is expected to increase policy rates by about 75 basis points in 2011 but if it is compelled to tighten more than this, markets could take it badly. An equally important factor for foreign investors is the political environment which doesn?t seem to be improving. All in all 2011, it appears will be difficult year for India?s markets.