New Delhi: Indian trade data released on Thursday pointed to the possibility of a more serious economic reversal than earlier assumed, potentially highlighting the need for another government-led economic stimulus package to spur domestic spending, which some expect could come as early as Saturday.
Exports declined for the second straight month in November, a commerce ministry report said, confirming fears about shrinking global demand as recession spreads across developed economies. A slowdown in the pace of non-oil import growth showed that domestic demand may be contracting even as inflation decelerated to a 10-month low.
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Some experts say that a further cut in the Indian central bank’s interest rates wouldn’t be sufficient and, instead, the government will need more measures to boost demand.
India’s economic growth is slowing dramatically after a credit crunch hurt companies’ investment plans, caused job losses and prompted consumers to abruptly start spending less.
Exports contracted by 9.9% in November, after declining by 12.1% in October. Significantly, growth in non-oil imports, which have been decelerating through the year, dropped to a new low for the year at 3.4%.
Falling exports, as also non-oil imports, indicate a worsening economic outlook, noted Biswajit Dhar, professor and head of the centre for WTO Studies at the Indian Institute of Foreign Trade. WTO is short for the World Trade Organization.
“Combine this with a slowdown in industrial production data and it clearly shows that we are deep into a downturn scenario,” Dhar said.
India’s industrial production had contracted, for the first time since 1993, by 0.4% in October.
In the eight months ended November, exports grew by 19.4% to $119.30 billion (Rs5.81 trillion); imports by 33% to $203.64 billion. The trade deficit, exports less imports, for the same period was $84.34 billion, compared with $53.19 billion a year earlier.
Weakening exports and domestic demand have forced companies including Tata Motors Ltd, India’s biggest automobile maker, and Hyundai Motor Co. to cut output. The government expects growth in the $1.2 trillion economy to cool to a six-year low in the 12 months to March.
“My difficulties are increasing as export orders are slowing due to the recession in Europe,” said Heung Soo Lheem, managing director of the Indian unit of Hyundai Motor Co., South Korea’s largest auto maker. “We need strong support from the government to keep our plants in good shape.”
Hyundai’s unit, which is India’s biggest car exporter, will miss its output target this year, he said.
The company, which is cutting some temporary staff in India, expects overseas orders to fall in the first quarter from a year earlier.
Demand for made-in-Asia goods has slumped across the region amid the deepening global economic slowdown. China’s exports in November fell 2.2%, the first decline in seven years. Singapore’s exports posted the biggest contraction in more than six years in the same month.
Government officials are confident that the trade setbacks will not pose any problems on the country’s balance of payments.
“Since balance of payment situation is not affected, we need not worry that much about the slowdown. What we need to do now is to boost investor confidence both domestically as also internationally,” said Montek Singh Ahluwalia, deputy chairman of the Planning Commission.
According to Dharmakirti Joshi, principal economist for Crisil Ltd, the Indian subsidiary of ratings firm Standard and Poor’s, the decline in imports was as much a function of reduced commodity prices as it was of a decline in domestic demand.
Some experts believe that the rapidly decelerating inflation rate provided the ideal cushion for the Reserve Bank of India (RBI) to press ahead with rate cuts.
India’s wholesale price index the most widely watched inflation measure, rose 6.38% in the 12 months to 20 December, slower than 6.61% in the previous week; well within the central bank’s forecast of around 7% for 2008-09.
This was India’s lowest reading since 1 March, and inflation has now more than halved from August’s peak of 12.91%.
However, prices of food articles, such as cereals and pulses, continue to rise. For the latest week ended 20 December, the price increase was 9.58% for cereals and 13.25% for pulses.
“I expect inflation to fall to 5-5.5% in the coming weeks and further down to 1.5-2% by March-end,” said Anubhuti Sahay, economist at Standard Chartered Bank.
“We expect the central bank to cut repo and reverse repo rates by 100 basis points on or before its (27) January policy meet,” she said.
RBI’s key lending rate, the repo, at which the central bank infuses liquidity into the financial system, now stands at 6.5% and the reverse repo rate, at which it absorbs cash from the market, at 5% after reductions since mid-October.
A proposal being mulled, said a person familiar with the situation who didn’t want to be identified, is a plan to advance arrears payment due to government officials as part of the implementation of the Pay Commission’s recommendations. Several meetings have been held by the government on the subject, the person added.
Bloomberg and Reuters also contributed to this story.