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Writing On The Wall

Monday, February 13, 2012
Deepak Sahijwala

The fragile state of the economy was reaffirmed last week, as data released showed that India's industrial output growth plunged to 1.8% in December 2011 as compared to a healthy 5.9% in November 2011. The contraction in the capital goods and mining sectors along with a weakness in the manufacturing sector dragged overall industrial growth down in December 2011. Marked volatility has been a key feature of the IIP data this fiscal, as industrial output clocked an average growth of 0.9% in the Q3FY12 (October-December period) as compared to 7% and 3.2% respectively in Q1 and Q2 of FY12.

According to data released by the Ministry of Statistics and Programme Implementation, capital goods production fell by a whopping 16.5%. Manufacturing, which is a major constituent of the IIP, expanded by just 1.8% in December, while the mining sector's output declined by 3.7%. Electricity generation was, however, robust at 9.1%.

Incidentally, the chairman of the Prime Minister's Economic Advisory Council, C. Rangarajan was optimistic of a revival in the rest of the current fiscal. "I believe that (figures for) the month of January, February and March, there could be a revival," he says.

However, not everybody is optimistic. “Going forward,” says Crisil Research “we expect the weakness in industrial output to continue even in the Q4 of FY12, as the upside to growth is limited.” The IIP growth for the first nine months of this fiscal stood at 3.6% and the advance estimate of government puts the industrial sector growth for the entire FY12 at 3.9%.

The data brings back the focus on the fragile state of the economy and demands that the Reserve Bank of India starts lowering interest rates at the earliest.

In the meanwhile, the markets have continued to ride high since the beginning of 2012. Most major indices have risen an average 12% in the past month and a half, despite uncertainty on many fronts, both domestic and international. The Sensex rose 11.25% and the Nifty rose 12.4% during January 2012. February has seen a further addition to these numbers. So can we deduce that the markets, which are usually forward looking, have discounted the worst? In my opinion there is a disconnect between the ‘Technicals’ and ‘Fundamentals’. While technically the indicators display the potential of a further rise, the fundamentals display weakness. The best solution in such a situation would be to book partial profits on every rise.

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