India's industrial sector sharply dropped 3.1%

Even as economy grew 5%.

According to DBS, in line with consensus, the economy expanded 5.0% YoY in FY12/13 slowing considerably from FY11/12’s 6.2%. For 4Q (Jan-Mar) output grew 4.8% slightly firmer than 4.5% in 3Q.

On sequential basis, the latter posted growth at 1.5% QoQ sa up from 1.1% average in the prior three quarters. A look at the performance of the key sub-sectors saw manufacturing output pick pace to 2.6% YoY in the final quarter of the fiscal year, up from 1Q-3Q average of 0.5% (factoring in revisions in backdated numbers).

Here's more from DBS:

The overall industrial sector, however, was weighed by sharp 3.1% contraction in the mining sector, as output was affected by the facility closures and supply distortions.

The crucial services sector also remained under strain on weak demand dynamics and filter-through of the slowdown in industrial and trade-related sectors.

Scaling back of government expenditure and protracted weakness in private consumption however persisted, which are partly a reflection of simultaneous cutback in fiscal support and tight monetary policy.

Early indications are that growth might have found a floor as activity in a handful of sectors gained their foothold, amid anchored inflationary expectations.

However, this is not to imply that there will be a substantial pick-up here on. Instead we expect the economy to register sub-6% growth for a second consecutive year in FY13/14. Our sub-consensus estimate is at 5.7%.

While fresh capex building and investment interests are still expected to stay weak ahead of next year’s elections, our base case is for a reversal in the last year’s fiscal consolidation efforts.

A look at the pattern of the recent pre-election years shows that spending is usually ramped up ahead of the polls and FY13/14 is unlikely to be any different.

The government had laid out a 16% increase in total expenditure, of which 29.4% increase in plan and 10% increase in non-plan components, at the late-February budget.

Towards the rural flagship programs in particular allotments witnessed a 46% increase. While the renewed fiscal push could prove beneficial for growth, budget targets stand to deteriorate especially if the tax and (ambitious) non-tax objectives are not met.

We see scope for an overshoot of circa half a percentage point from the official target of 4.8% of GDP.

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