After a long time there?s some good news from the economy: following five months of weakness, manufacturing has bounced back with the seasonally adjusted HSBC PMI for October coming in at 52, up from 50.4 in September. A glance at the data shows that there?s been a welcome spurt in new orders rose: so that should mean projects are getting off the ground and that there?s a fairly sharp uptick in export orders.
One could argue that the rebound has something to do with the festive demand and may not signal the start of a sustained uptrend; for instance sales at Hero Motocorp were flat in October. But input prices appear to be stabilising which would help companies keep raw material costs in check and sustain operating margins which have been under tremendous pressure.
Again, as Rohini Malkani, chief economist at Citigroup points out, stocks of raw materials increased, albeit marginally while stocks of finished goods saw a slight deceleration to 49.7. The inventory re-stocking could suggest that producers are turning more optimistic, while the decline in stocks of finished goods may indicate improving sales.
However, since most of the other data coming in isn?t exciting, it?s too early to celebrate. The rise in aggregate gross tax collections, for instance, decelerated to 6.6% yoy in September from 22.2% yoy in August with both corporate income taxes and excise duties flat.
The core sector data too was pretty dismal with the infrastructure space growing at just 2.3% in September, the slowest pace in more than two and a half years. The increase in the output of the eight industries didn?t come off a very high base either, just 3.3%.
Of course some of the slowdown was anticipated in that lower coal production was expected to drag down output. Nonetheless, it looks like industrial growth, which had improved to 4.04% in August after coming in at a poor 3.8% in July, will languish for a while with a possible blip in the festive months.
While project starts in the September quarter may have been at their lowest levels in nine quarters, CMIE data also shows that despite delays, the number of projects commissioned between April and September this year is more or less as it was last year which means a fair number of projects is being commissioned. Loan growth to the infrastructure sector, however, is up just 20.3%yoy in September this year, compared with a growth of 47.4 % yoy last year. The good bit is that the stock of projects is high; it?s just that they?re being held up for one reason or another. But that?s little consolation because the delays will mean that the capex cycle may not turn till 2013.
Indeed, it?s hard to see companies drawing down loans at the current cost of money and it could take another six to eight months before interest rates start coming off. In other words, the economy which is now projected to grow at close to 7.3-7.4% in 2011-12 , might grow at an even slower pace in the following year. The central bank is betting that inflation will taper off to 7% by March next year. It would be unfortunate though if growth were to fall off to sub-7% levels in 2012-13.