Economy in a tailspin: IIP in negative zone; Re at all-time low

With a 5.1% de-growth in industrial production in October and rupee hit its all-time low of 52.84, finance minister Pranab Mukherjee said in Rajya Sabha that it would be a challenge to maintain the fiscal deficit at 4.6% of the GDP projected earlier

New Delhi: In a double whammy, negative industrial output and sliding rupee against the US dollar have added to the woes of already slowing Indian economy and finance minister Pranab Mukherjee said it would be a challenge to maintain the fiscal deficit at 4.6% of the gross domestic product (GDP), reports PTI.

The industrial production registered a negative growth of 5.1% in October, pushing stock markets into a tailspin with 30-share BSE Sensex shedding over 340 points. The fall Sensex eroded nearly Rs3 lakh crore of investor wealth.

The rupee hit its all-time low of 52.84 against the dollar as demand for the US currency soared amid signs of foreign institutional investors (FIIs) pulling out money in the wake of negative growth in industrial output.

The falling rupee will make imports costlier, which in turn would affect the industrial production. However, exporters may stand to gain with decline in rupee value.

Amid these concerns, Mr Mukherjee said in Rajya Sabha (Upper House of Indian Parliament) that it would be a challenge to maintain the fiscal deficit at 4.6% of the GDP projected earlier.

“Around Rs 53,000 crore of (additional) borrowings we had to resort to manage the cash flow, but nonetheless it will have a stress and it will have its effect in the course of the year if the corrective steps are not taken,” he said in the House while introducing the Appropriation Bill.

In view of the negative factory output and moderation in inflation, especially food prices, the Reserve Bank of India (RBI) may lower key policy rates—which it has increased for 13 times since March 2010—in the monetary policy review on 16th December, feel experts.

Describing the IIP numbers as disappointing, chairman of Prime Minister’s Economic Advisory Council C Rangarajan, said, “Somewhat lower growth in industrial production was expected, but not a negative growth.” 

The government has already lowered the growth projection for 2011-12 to 7.25%-7.75%, down from 8.5% in the previous fiscal.

“We certainly need to look at all our actions in order to provide situation in which the industrial growth rate is not only in the positive but it is respectably high,” Mr Rangarajan said.

With regard to the monetary policy, Mr Rangarajan said, the RBI will have to look at what is happening to the inflationary trend. “If the inflation trend indicates a definite decline, then perhaps (reversal) of policy actions can be thought of,” he added.

In the backdrop of the latest numbers, the government will hold consultations on 19th December with industry leaders.

Commerce and industry minister Anand Sharma will hold government-industry consultation on the issue.

As per Monday’s data, while the mining sector output declined by 7.2% in October, the decline was 6% in case of manufacturing sector, which accounts for over 75% weight in the index.

Mining and manufacturing grew 6.1% and 12.3% respectively during the corresponding period a year ago.

As per the data, industrial output growth moderated to 3.5% in the April-October period this fiscal, as against 8.7% in the same period last year.

Production of capital goods fell sharply by 25.5% in October. The segment had grown by 21.1% in the corresponding month of 2010.

“The 5.1% de-growth in industrial production in October 2011 was considerably inferior as compared to the consensus estimates...Over the recent months, investment and consumption growth have displayed signs of a slowdown,” ICRA economist Aditi Nayar said.

Industry has also asked for a relaxation of the interest rates. CII termed the IIP numbers as “serious disappointment to industry”.

“If allowed to continue, this (de-growth) would have serious consequences on employment and livelihoods,” CII director general Chandrajit Banejree said., adding that RBI should begin the roll-back of interest rates.


StanChart pegs GDP at 7.4% for FY12-13

“Growth in Asia’s third largest economy is expected to accelerate mildly to 7.4% in the fiscal starting April 2012, from (projected) 7% in the current financial year,” StanChart’s titled ‘Global Focus-2012’ said

Mumbai: The domestic economy is expected to post a growth to 7.4% next fiscal against the projected growth of 7% this financial year, reports PTI quoting a study by Standard Chartered Bank.

“Growth in Asia’s third largest economy is expected to accelerate mildly to 7.4% in the fiscal starting April 2012, from (projected) 7% in the current financial year,” the study titled ‘Global Focus-2012’ said.

It, however, pointed out that the global economy is likely to slowdown in 2012 with a fragile West and a resilient Asia, Africa, the Middle East and Latin America.

“This points to the continuation of a two-world where a fragile West contrasts with a resilient East ... Yet, no region is fully decoupled from events elsewhere.

“During the first half of 2012, problems in Europe and the West will weigh on global growth. By the second half, stronger growth across China and other emerging economies should pull up worldwide activity. It will be a recovery made in the East and felt in the West,” Standard Chartered chief economist group head of global research Gerard Lyons said.

The study also said mounting crisis in the advanced economies is expected to cause the euro area and Britain to fall back to recession and the US growth to remain below-trend.

Referring to growth in Asia, the study said despite some slowdown in growth in the continent, it would still remain robust in the next financial year.

“Asia’s gross domestic product (GDP) growth will slow to a still robust 6.5% in 2012 from 7.3% in 2011,” it said adding the Chinese economy is expected to cool in the first few months of 2012 before rebounding due to a major policy boost.

As per the report, growth in the Asia’s largest economy will decelerate from 9.2% to 8.1% in 2013.

About growth of the world economy, the study forecasts that global growth will be around 2.2% for the full year from around 3% in 2011.

The report also said the US dollar will weaken in the future reflecting the significant debt overhang for the US economy.

“The US currency performs well in an environment of risk aversion, but on a multi-year basis, this implies a weakening dollar, reflecting the significant debt overhang for the US economy and gradual diversification away from the dollar by governments and other international investors,” the report said.

It also said the euro would weaken in the first quarter of 2012. “The weaker longer-term outlook for the world’s two largest reserve currencies signals the continuation of the multi-year shift into emerging market economies and currencies, reflecting both their rising role in the global economy and their significant role in global trade,” the report said.


IIP contraction: Economists caution against policy easing

HDFC Bank chief economist Abheek Barua said, “Even though price pressure is likely to ease going ahead with the first sign of moderation coming as early as this week, inflation still remains high and there is still some uncertainty over how it can pan out going ahead”

Mumbai: Even as the 5.1-percentage points contraction in the factory output data came as a rude shock, leading economists and analysts on Monday advised the Reserve Bank of India (RBI) against any knee-jerk reaction on the monetary front as inflation still remains highly elevated, reports PTI.

Earlier in the day, the government released the factory output number for October that showed manufacturing contracted by a whopping 5.1% in the month against 11.3% growth a year ago, hitting a 34-month low.

HDFC Bank chief economist Abheek Barua said, “Even though price pressure is likely to ease going ahead with the first sign of moderation coming as early as this week, inflation still remains high and there is still some uncertainty over how it can pan out going ahead.

“We therefore expect RBI to maintain key policy rates on December 16, and abstain from a cash reserve ratio (CRR) cut. The central bank could, however, build in a dovish forward guidance throwing the door open for a CRR cut when it meets in January, timing it with a possible expansion in government borrowings at the time,” Mr Barua said.

HSBC Asia chief economist Lief Eskeseen too opined that “Though the massive contraction in the IIP numbers was partly coloured by the volatility of the capital goods segment and the timing of Diwali, it goes well-beyond this and reflects a broad-based slowdown.

“However, this does not mean that rate cuts are just around the corner. Inflation remains too high for comfort and downward pressures on the exchange also act as a constraint.

“Despite the slowdown in growth, there are still significant upside risks to inflation from tight capacity, pent-up commodity prices pressures, and the depreciated exchange rate. Moreover, RBI is fighting a lonely battle against inflation, with the fiscal stance not sufficiently tight and structural reform efforts to lift supply-side constraints not rolling out fast enough,” he said.

The RBI has increased its key lending rate by a total of 375 basis points since March 2010 to batten down inflation that has stayed above nine percent for nearly a year. However, its rate hikes have done more to dampen growth than tame inflation. The September quarter GDP rose only 6.9%, the slowest in over two years.

Manufacturing output, which contributes about 76% to industrial production, fell an annual 6% in October, reflecting weak consumer demand at home and overseas.

On the policy front, HSBC said RBI will have to keep monetary policy settings tight for some more time to get inflation under control.

“Moreover, RBI would need to see a further worsening in a broader range of economic indicators (such as PMI readings and credit growth) before they dramatically change their perspective on the economic outlook. A key thing is the extent to which the all important service sector holds up. Inflation would also have to come off more notably before the policy concern shifts from inflation to growth.”

Global investment firm Nomura said though the IIP numbers were much lower than its forecast of -0.7%-1.1%, “we believe the October print exaggerates the slowdown in manufacturing activity as the month had fewer working days this year than last. Therefore we expect the November reading to be more positive.”

However, it expects the RBI to keep policy rates unchanged at its 16th December meeting saying that although economic activity continues to slow down, we expect core inflation to remain elevated in November.

“From a policy perspective, although economic activity is likely to weaken in the months ahead, we believe inflation will remain RBI's primary concern. We expect core inflation to remain high in November, hence we expect RBI to stay on hold at its 16th December meeting,” Nomura said in a statement.

Kotak Mahindra Bank chief economist Indranil Pan, said though global concerns will be a major headwind for the domestic economy and the slowdown in real, any RBI intervention at this juncture “should be limited and only for managing volatility on making money cheaper as inflation still remains high though slowly moderating.”

Barclays Capital said the dip is markedly weaker than the already subdued market expectations and at the lower end of street expectations and opined that no quick recovery is on sight yet.

On the policy side, it said RBI is set to maintain status quo and added that aggravating weakness in IIP has further complicated the job of the central bank as continued dip in manufacturing activity will not necessarily offer any respite on the inflation front.

Barclays pegged the November inflation, expected on Wednesday, at 9%.

Though the sharp deterioration in the growth trajectory increases the pressure on the RBI to ease its monetary policy stance, “we think, an average headline inflation of over 7% is a clear deterrent against any rapid change in monetary policy.” 

“Therefore, we expect RBI to hold the policy rate steady over the remaining months of the current fiscal year. We think cuts in the repo rate could start taking place from mid-2012.

“We assign only a small probability to easing in the repo rate before Q2 of 2012, unless there is a major deterioration in global economic and financial market conditions,” Barclays said.

The largest rating agency Crisil attributed the contraction to high base effect coupled with the deterioration in both domestic and global economic scenario and said for the remaining months of this fiscal it expected the IIP growth to remain weak but in positive territory.

D&B India senior economist Arun Singh too concurred and said the sharp contraction in the IIP data, significantly more than anticipated, indicates the slowdown that has set in the economy but it also indicates the high base effect.


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