India's weak industrial production in August signals manufacturing malaise

Government action is needed to cement recovery.

India's factory output was roughly unchanged on the year in August, against expectations of a pick-up, and volatile capital goods and weather sensitive consumer non-durables weighed on the index.

According to a report from HSBC Global Research, as it suspected, local demand is only recovering gradually.

What's needed, the report said, is a faster clearing of projects currently stuck in the pipeline. It said things are moving along, but there's plenty left to do.

The recent dip in commodity prices helps India especially by cutting costs, imports, and price pressures.

Here's more from HSBC Global Research:

Industrial production was weaker than expected, which is indicative of a broad-based malaise in manufacturing. Details within the HSBC manufacturing PMI suggest that this was domestically led, with export orders within the PMI survey improving in August.

We had expected some moderation in growth after the post-election bounce. A weak start to monsoon rains, high corporate leverage and a tight macro policy setting were always likely to dampen growth momentum.

At the same time, investment was forecast to improve gradually due to rising investor confidence. The weak industrial production figure led by capital goods further reinforces our view that the recovery will be gradual and not without challenges.

At same time, there is no reason for despair. Foreign direct investment (FDI) inflows have been robust and Prime Minister Modi has reportedly secured USD 100bn in overseas capital funding over the next five years.

Moreover, the softening in global commodity prices is positive news for India, which is a net importer of commodities, helping to contain its twin deficits.

Macro fundamentals are also heading in the right direction with the central bank keen on putting the house in order: inflation is heading lower and external buffers are in a solid shape thanks the central bank’s prudent policy action.

There has also been an increase in equity issuance, which suggests that corporates are using buoyant markets to deleverage.

To re-start the investment cycle it will be important to put back on track projects that have been stalled or stuck, mostly for want of some regulatory clearance.

This seems to be happening already, with the latest data showing a shrinking number of stalled investment projects.

The pace no doubt needs to be quickened, which can be achieved by increasing the focus of the administration.

The central bank, too, is highlighting the need to move quickly to accelerate investment projects, which it believes will put growth on a firmer footing and reduce supply-side risks to inflation.

The steady deterioration in business sentiment post-elections, reflected by HSBC's services PMI, remains a source of worry.

Investor sentiment will likely take a knock in light of the Supreme Court’s recent decision to cancel all coal block allocations since 1993. While this is negative for investors in existing mines, at the same it provides the government an opportunity to start with a clean slate.

Moving quickly to auction these mines through a transparent process before year-end, would help improve sentiment.

The growth recovery may be slow, but with an action oriented government in place and policies headed in the right direction, the pace should pick up with time.

August industrial production was weaker than expected driven by a fall in the volatile capital goods index and in the weather sensitive consumer non-durables segment.

This reinforces our view that the recovery will be gradual. Government action that clears stuck projects, thereby boosting confidence, is needed to cement the recovery.