Most of us love watching melodramatic Hindi movies. You may have watched one typical scene quite often; a patient miraculously survives despite his electrocardiogram (ECG) showing a straight line. The Indian industry is also passing through a same phase. It looked like the economy was getting back on track when the industry recorded strong revival in growth during the first quarter of the current fiscal. However, the growth measured by the movement of Index of Industrial Production (IIP) has nearly come to a halt in July and August. During these two months, IIP grew at a same rate, forming a straight line on graph. Now the question is whether the industrial growth revives or we may go back to square one. Unlike that in a Hindi movie, Indian economy doesn't have any messiah to do some miracle.

  Growth comes full circle...

(Source: CSO, PersonalFN Research)  

IIP advanced by just 0.4% in August. The growth number for July was revised downward from 0.5% to 0.4%. It is noteworthy that, the industry had grown at the same rate even in August 2013. So it wouldn't be wrong to say that industry hasn't moved anywhere over last one year. IIP for May has been revised upwards from 5.0% to 5.6%, but considering the loss in growth momentum thereafter, such a revision holds negligible importance now.

Speaking about IIP growth in August, fall in manufacturing growth (down by 1.4%), flat growth in mining (up by 2.6%) dragged the performance Indian industry. However, strong growth in the electricity sector (up by 12.9%) provided some support. Within manufacturing sectors, consumer goods recorded negative growth of 6.9%. Demand for consumer durable still remains extremely poor. Consumer non-durable segment too recorded negative growth of 0.9% in August. Basic and intermediate goods segments witnessed growth of 9.6% and 0.3% respectively. Capital goods sector hit a rough patch again recording a fall of 11.3%.

How markets have reacted...
Markets opened in negative but recovered thereafter indicating that, weak IIP has not impacted the market sentiment much. Pace of buying from Foreign Institutional Investors (FIIs) has reduced considerably over last 2 months. Market valuation appears to be expensive. The market may closely track other macro-economic variables such as credit off take, inflation and monetary policy stance of RBI among others.

What to expect?
PersonalFN is of the view that, drop in IIP in July and August, especially after witnessing a strong performance in Q1, suggest that, industrial recovery still remains fragile. Unless capex cycle revives strongly, pace of growth in the industrial output may remain lacklustre. Having said this, PersonalFN expects markets to track Q2 earnings of companies very closely. If they disappoint, markets may come off sharply. Falling crude oil prices have been a boon to India. This may help Indian Government oil subsidies and channelise resources towards developmental projects and creation of infrastructure. High interest rates also impede the way of companies willing to invest in capacity addition. Huge level of (Non-Performing Assets NPAs) has incapacitated Indian banks which are now going slow on lending activity. Balance sheets of many companies that may kick start capex activity appear largely stretched because of high level of already created debt. This may limit their borrowing capacity and affect expansion plans as well.

PersonalFN is of the view that, investors shouldn't speculate about the industrial performance. Focusing on personalised asset allocation may instead help them achieve their financial goals.

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