My comment in Economic times

IIP grows at 11.8% in Oct on festive demand

15 Dec, 2007, 0058 hrs IST,Pallavi Mulay, TNN

The index of industrial production (IIP) grew at 11.8% in October 2007. Driven by a 13.3% manufacturing growth, this is the fastest in the past six months. A robust festive demand has been the key factor. This is evident from a 12.5% increase in consumer goods on account of strong growth in durables as well as non-durables.

Capital goods and intermediate goods are other sectors that recorded an accelerated growth at 20.5% and 14.2%, respectively. However, production of basic goods slipped to 6.2% this month. Overall industrial performance is satisfactory in October 2007.

Such a spectacular growth was obvious for two reasons: pre-Diwali buying buoyed demand while a low growth of 4.5% in October 2006 improved the present number. Whether this can be sustained is another point.

ABN Amro’s purchase manufacturing index, which is an indicator of manufacturing activity, has slowed down to 60.9 in November 2007 from the highest level of 61.7 attained in October 2007. Nevertheless, the survey has signaled an improvement in operating conditions in the Indian manufacturing sector this month. The order book is estimated to be healthy. However, mounting input cost is a concern. So far, manufactures have managed to hold on to their margins as they were able to hike output prices, says the survey.

Going forward, the Reserve Bank’s policy stance will be a deciding factor. Inflation numbers may go up in the coming weeks, thanks to base effect and a possible hike in fuel price. In addition, demand factors are expected to be benign. Capital flows following rate cuts may build inflationary expectations and leave RBI with little room to cut rates.

India Inc, on the other hand, is expecting a rate cut. Rate hikes and liquidity tightening in recent times may have affected the overall industrial growth, which has marginally dipped to 9.7% during April-October 2007 as against 10.7% in the year-ago period. Under the circumstances, if RBI holds interest rates and goes for a further hike in the cash reserve ratio, industrial growth may be adversely affected.

Anjali R,Pune,says:The numbers are encouraging!! But are they sustainable? Looking at the tight monetary policy, high interest rates and thereby suffering manufacturing sector, appreciating rupee which is discouraging exports especially from employment-intensive sectors and high base effect in index of industrial production may play a spoil sport in coming months. India's blistering economic growth slowed to 8.9% in the second quarter to September 2007, from a year earlier, hit by a downturn in manufacturing as higher interest rates and a strong rupee dragged on manufacturing and exports.

Though exports battled a rising rupee and an impending US slowdown to grow a healthy 35.65% in October 2007 to a seven-month high of $13.3 billion against the $9.8 billion recorded a year ago, the low base effect cannot be ignored. The exports registered a sequential slowdown from $10.7 million in September 2006 (growth of 47.06%) to $9.8 million in October 2006, clocking an annual growth of 21%. However, the October figures failed to cheer the economy fully, as exports from employment-intensive sectors like textiles, handicrafts and marine products had dipped significantly and exports would still fall way short of the target of $160 billion for the current financial year.

The rupee which has appreciated to 39.36 a dollar on 12 December 2007 from 39.56 a dollar on 3 December 2007 on back of capital inflows, will affect the exports growth. A close watch on inflation is necessary. The country's inflation is driven largely by spurt in agri commodity prices. With the global commodity prices on up heal and poor expected wheat crop in rabi season domestically, coupled with recent rise in global crude oil prices could un bottle the inflation genie. 15 Dec 2007, 1243 hrs IST

My comment on Business Standard news

Oct industrial growth jumps to 11.8%
BS Reporter / New Delhi December 13, 2007

Experts cite festive buying, robust exports and low-base effect.

Festive buying, robust exports and low-base effect pushed up industrial output growth during October to a seven-month high of 11.8 per cent as against 4.5 per cent in the same month of the previous year.

This comes after industrial production dipped to a six-month low of 6.77 per cent during the previous month, mainly on account of high interest rates and a strong rupee.

“This was expected. Festive buying, coupled with a 35 per cent growth in exports in dollar terms and a lower industrial output in the same month of the previous year are responsible for the October numbers,” said Shubhada Rao, chief economist, Yes Bank.

According to Rao, the impact of the tightening monetary policy has not worn off and it will be difficult to sustain the October growth. “During 2007-08, industrial growth should be around 9.5 per cent.”

However, signs of moderation in industrial output were visible in the April-October period of this year as cumulative industrial production growth stood at 9.7 per cent, which was lower than the 10.1 per cent rise in the corresponding period of the previous year.

Finance Minister P Chidambaram said it was early to comment if the growth rates in October could be sustained in the coming months.

“The April-October figures are slightly lower than previous year’s (figures). We will have to wait and see the November figures,” he told news agencies.

Analysts assured one should not be alarmed by the moderation in the industrial output in the April-October period. “Such moderation is normal under current circumstances. I expect the cumulative growth in industrial output to be around 9 per cent by the end of 2007-08,” said Samiran Chakrabarty, chief economist, ICICI Bank.

Industrial output during the month was fueled by a seven-month-high growth in the manufacturing sector (comprising 80 per cent of India’s industrial production), which stood at 13.3 per cent during the month as against 3.8 per cent in the year-ago period.

But in the April-October period, the cumulative growth was 10.4 per cent, marginally lower than the 11.1 per cent a year ago.

Festive buying pushed up sales of consumer durables to a seven-month high of 9.3 per cent as against 0.2 per cent a year ago. But in the April-October period, the sector recorded a dip of 1.3 per cent as against a 12.7 per cent growth in the corresponding period of the previous year.

The mining sector’s output in October slowed to 3.7 per cent as against 5.9 per cent a year ago. Electricity production also went down in October with a growth of 4.2 per cent as against 9.7 per cent in the same month of the previous year.

A slowdown was also seen in the basic goods sector, where output increased by 6.2 per cent as against 10.5 per cent during the month under consideration.

The sectors that have performed well during the month include capital goods, whose production increased by 20.5 per cent as against 6.5 per cent in the same month of the previous year.

Intermediate goods also saw a healthy growth rate of 14.2 per cent during the month as against 5.9 per cent in the same month of the previous year.

Story Comments

Total Post : 3

Posted By : anjalir on 13 December,2007
The numbers are encouraging!! But are they sustainable? Looking at the tight monetary policy, high interest rates and thereby suffering manufacturing sector, appreciating rupee which is discouraging exports and high base effect in IIP may play a spoil sport in coming months. India's blistering economic growth slowed to 8.9% in the second quarter to September 2007 hit by a downturn in manufacturing as higher interest rates and a strong rupee dragged on manufacturing and exports.


Posted By : anjalir on 13 December,2007
Though exports battled a rising rupee and an impending US slowdown to grow a healthy 35.65% in October 2007, the low base effect cannot be ignored. However, the October figures failed to cheer the economy fully, as exports from employment-intensive sectors like textiles, handicrafts and marine products had dipped significantly and exports would still fall way short of the target of $160 billion for the current financial year.


Posted By : anjalir on 13 December,2007
The rupee which has appreciated to 39.36 a dollar on 12 December 2007 over 39.56 a dollar on 3 December 2007 on back of capital inflows, will affect the exports growth.With the global commodity prices on up heal and poor expected wheat crop in rabi season domestically, coupled with recent rise in global crude oil prices could un bottle the inflation genie.

Infra structure, real estate, global funds-Are the sector specific funds true mutual funds?

The biggest advantage of mutual funds is getting decent return on one's investment without having to go through the complexity of investment management oneself. You write a cheque and that's that. After that, which sector or industry is doing well or badly and what to move in or out of is no longer your headache. All that is the fund manager's problem. In fact, this offloading of decisions to a professional fund manager is the whole point of investing in a mutual fund.

However the recent NFOs provide a completely different picture. The theme-based funds (maximum of NFOs are theme based) defeat the three very basic ideas of investing in MFs – diversification, professional expertise and regular monitoring.

Firstly, you are concentrating your portfolio and thereby increasing the risk. MF was supposed to be a route to diversify investment, not concentrate it.

Secondly, you are taking a call on the market as to which sectors will do well. You have entrusted your money to a professional fund manager. Don’t you think you should invest in a diversified fund vis-à-vis a sector fund and leave it to his expertise and experience to decide on the potential sectors (in fact, that’s precisely his job)?

Thirdly, since you don’t know when the tide will turn, you need to constantly monitor a theme-based portfolio. Again, you have opted for MF, as you didn’t have much time to regularly monitor our investments.

During November and December so far, 11 new equity mutual funds have been offered to the public. An interesting aspect of the NFOs this time is that they are predominantly sector or theme specific. The current fancy is infrastructure, real-estate and global funds.

Out of all the NFOs one-exactly one-is of the type where the fund manager will be taking the entire gamut of investing decisions. In all others, the investor will have to lend him a helping hand.

Almost all funds that are launched nowadays are specialised in some way. There are real estate funds, energy funds, small companies funds, emerging marketing funds, and so on and so forth. Per se, there's nothing wrong with the idea of specialised funds.

However, when almost the entire market for mutual funds gets converted to specialised funds, then there's a problem, because deciding between these funds is a job by itself. When you invest in a well-run generic equity fund that can invest in any kind of company, then it's the fund manager who decides what type of sector, industry or size of company to invest in. It's his job to analyse trends and figure out how much of your money needs to be in technology or oil companies or infrastructure or real estate or whatever. But when you invest in specialised funds, then that analysis and that decision has to be made by you. You must take a call on what percentage of your investments to put in what industry and when to put it in and when to pull it out and switch to some other industry or type of company. Does this sound like a good deal to you? It doesn't sound like one to me.

Theme-based funds-what’s wrong?

Interestingly, one of the guidelines on NFOs was that an AMC cannot launch new funds which are similar to any of their existing schemes. Most AMCs already have the conventional diversified and mid-cap funds. Hence, this rush for sector/theme-based schemes! (By the way, some of the so-called theme-based funds are so broad-based that they mimic a diversified fund; the fancy-named NFO being just a marketing maneuver).

But the problem is you don’t know when the fancy starts or when it ends. It could be months or it could be years. So you could either exit too early and miss the best part of the rally or exit too late when all the cream is gone.

Time and again, something or the other will catch the fancy of the market. And then everyone will rush headlong into it. Once upon a time it was Technology, Pharma or Auto. Today no one even talks about them. Now it’s infrastructure and real estate. Tomorrow, they too would be forgotten.

Given all this, theme-based funds carry a higher risk than diversified funds. However, if you are keen in investing, it would be prudent to invest only a small percentage of your corpus in such sector/theme-based funds.