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India Economy: Data Update; IIP Sep-19 - Worse than expectations, continue tobe hopeful of recovery in H2FY20

Similar to core industries output, IIP too recorded its worst print in Sep-19 (since its rebasing to 2011-12) with a 4.3%yoy decline in headline series. We attribute this weakness mainly to ongoing weak economic backdrop and partly to unseasonal rain in September (which impacts mining and electricity output to some extent). Moving average and CAGR trends aren’t encouraging either as major sub-components of the series continue to exhibit weakness. Though, current weakness in IIP numbers is slightly worse than earlier expectations, we however, expect growth to start exhibiting recovery H2FY20 onwards as most of the factors contributing to current slowdown are being addressed: 1) There is effort from government towards private capex and demand revival through corporate tax rate cuts, 2) We have been in monetary easing cycle since Feb-19 and there easy liquidity facilitated by RBI, 3) Government expenditure has continued to exhibit strength too, particularly in September, despite weak collections and 4)  There are strengthening expectations of trade talks resolution soon. This along with a low base in H2FY20 should facilitate growth trajectory reversal H2 onwards, in our view.

Summary of the data release:

• Sep-19 IIP saw a decline of 4.3%yoy, which is worst since series got rebased to 2011-12
• The decline headline series is in line with core industries movement and comes on back of a moderate base of 4.6%yoy growth in Sep-18.
• Unfortunately 2 and 3 year CGAR continue to be weak too with 0.4% and 1.4% growth respectively.
• 3year CAGR is calculated on a pre-demonetisation base and a feeble growth there indicates a poor growth recovery post dual disruption (GST and Demonetisation).
• 6mma also is exhibiting a sharp downward momentum across sub components as well as in headline series. Headline IIP exhibited a mere 1.3%yoy growth on a 6mma basis.
• On economic activity side – all sub-segments were weak, particularly mining and manufacturing. We believe mining also saw impact of unseasonal rain and was down 8.5%yoy. 17 out of 23 industry groups saw a decline in output here, indicating a weakness across breadth.

·      While on usage side, barring intermediate goods, everything else saw a decline on a yoy basis. Intermediate goods grew 7%yoy, while capital goods saw a steep 21%yoy decline.