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MACRO: ASIA -Indian Industrial Production

Although the November numbers look bullish on the margin, we think it is a head fake…

India’s industrial production numbers came in at 2.4% for November, unexpectedly stronger, sequentially, after October’s -0.34% decline. This positive data point was not enough to stem the tide of post -Satyam selling as Sensex sold off by another -3.2% on the heels of a -1.88% decline in Friday’s session. The cumulative decline in India’s stock market has been approximately -12% in less than a week.

This production data looks positive on the margin. From an industrial manufacturing standpoint, India should have a few things going for it now… in Theory:

• Cheap Labor and good engineering schools
• Lower basic material prices globally
• Strategic geographic location
• Sharply decreased maritime shipping costs
Whereas the Services sector is being held hostage by declining demand in the US and Europe, and the problems facing the agricultural sector are too involved to touch on here, the Industrial portion of the subcontinent’s economy should be able to retain a relatively competitive stance in pursuit of what demand remains. It probably won’t.

India’s union biased employment laws and socialist governmental policies will make it difficult for producers to capitalize on the vast sea of cheap skilled and unskilled labor around them effectively. Additionally, the obese overlapping state, local and national governmental bureaucracies have made it virtually impossible to create new industrial facilities –with years’ worth of legal wrangling required to build new factories and badly needed new ports.

We have been negatively biased regarding India since I started at Research edge, which was the day we opened our door. We continue to believe that the deep structural flaws in the Indian economy outweigh the massive potential that lies there.

Andrew Barber