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IIP weaker than expected
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The data...

IIP growth surprised sharply to the downside growing by only 0.5% in November-2018 as compared to 8.4% in October-2018. The weakness was fairly broad-based with manufacturing production growth contracting by 0.4% in October-2018. There was also a simultaneous decline in consumer production and capital goods production growth as well. After a sharp increase of 8.4% seen in October-2018, the IIP reading for November-2018 was expected to soften partly reflecting an adverse base-effect. However, the headline IIP growth of just 0.5% was a substantial downside surprise. Perhaps, the more worrying aspect was that the decline was fairly broad-based. 

Key issues..

• The main area of concern and source of surprise pertains to the 0.4% contraction in manufacturing production. Around 13 of the 23 sub-sectors under manufacturing production contracted. It is quite possible that the weakness in exports that grew by just 0.8% in November-2018 on the back of weakening global demand played a role as export oriented sectors such as textiles, chemical products and leather related products contracted by 4.8%, 6.4% and 6.6% respectively. 

• The softening in mining sector production growth from 7.2% in October-2018 to 2.7% in November-2018 was expected and was weighed down by contraction in crude oil and natural gas production. Coal production was strong at 7.1% that ensured that the mining sector at the aggregate level did not contract.

• Electricity production also slowed from 10.8% in October-2018 to 5.1% in November-2018 that is compatible with the data that was released by the Central Electricity Authority that showed that electricity generation had slowed on a sequential basis.

Conclusion...

The weakness in the November print has to be monitored going ahead for possibilities of a more sustained slowdown and may leading to a GDP print of less than 7% YoY going forward. Given that the IIP is used as an input for GVA computation, there could be some downside risks to the H2FY2019 growth projections.


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