Mumbai: Most India-focused economists still swear by an 8%-plus economic growth this year, but a few of them are increasingly becoming sceptical about this number, pointing to slowing momentum in the investment cycle, discrepancies in official data and murmurs about slowing order books from industry executives.
While the government and the Reserve Bank of India (RBI) have set an 8.5% gross domestic product (GDP) growth target for this year, this could prove elusive unless investments pick up across sectors in the second half of this fiscal year, these economists say.
Also See | Conflicting signals (Graphic)
This is not good news for the equity market, which has been on a roll. The Bombay Stock Exchange sensitive index, the Sensex, closed on Tuesday at 20,543.08 points, just 300 shy of the bellwether’s lifetime high, buoyed by record purchases by foreign institutional investors (FIIs).
FIIs have made net purchases of equities worth $20.34 billion (Rs90,106 crore) this year, attracted by the country’s high growth trajectory.
India is the fastest growing of the world’s major economies after China and Brazil while the Sensex has outperformed the MSCI Emerging Markets Index by 10% this year, giving returns of more than 20% in 2010.
Indeed, there are definite signs of revival in quite a few sectors such as automobiles and consumer durables, but there is little evidence of a broad-based pick-up in activity, economists say.
Discrepancies in official data on factory output have added to the scepticism about the current rate of industrial growth.
“There is still no conclusive evidence to suggest that the investment cycle has picked up in earnest, except in infrastructure,” said Sajjid Chinoy, economist at JPMorgan India Pvt. Ltd. “There is no conviction in other corroborating indicators like non-food credit, manufacturing PMIs, port or freight traffic to suggest we are on the cusp of a sharp upturn in investment.”
Order book expansion has slowed, said executives from two construction firms who didn’t want to be identified.
A 29 September report by Dhananjay Sinha, economist and equity strategist at Centrum Broking Pvt. Ltd, shows the growth in the Capital Goods Index of the Index of Industrial Production (IIP) actually peaked in January and has slowed since then, once the data on “insulated cables”, which has been causing huge volatility in the index, is factored out.
Insulated cables and wires constitute 2.6% of the Capital Goods Index, but contributed to 46% of the growth in the July IIP numbers. RBI, too, has expressed its doubts about the reliability of this set of numbers.
“Though the year-on-year growth rate for the first four months of the year remains robust at 11.4%, the high volatility over the past two months raises some doubts about how effectively the index reflects the underlying momentum in the industrial sector,” RBI’s September policy review said in reference to the abnormal rise in the July numbers.
RBI, though, had revised its growth target upwards to 8.5% for this fiscal in the April quarterly review on the basis of the revival in industrial growth, based on earlier IIP numbers.
“A lot of growth is in ill-measured items like insulated cables for capital goods and alarm time pieces which raises doubts on IIP numbers,” said Tirthankar Patnaik, equity strategist at Religare Capital Markets Ltd.
Another, often overlooked, factor is the increasing dependence of Indian manufacturing on the external sector. The annual report on currency and finance released by RBI in July shows that 72.3% of manufacturing output was exported in 2008-09.
“Given the increasing correlation between exports growth and industrial production, IIP will likely moderate in the second half if exports continue to moderate and the investment cycle does not pick up soon,” said Chinoy.
The HSBC Markit Purchasing Managers’ Index (PMI), a leading indicator of manufacturing output, was at its lowest level in September for the year in most parts of the world, including India and China.
A slowdown in cargo handled by ports since January, according to data from the Indian Ports Association, and a fall in railway freight indicates that economic activity has already peaked, Sinha of Centrum said in his report.
Railway goods traffic growth slowed to 1.3% in July compared with 4.8% average growth between June 2008 and July 2010.
Total port traffic contracted by 5% in August after growing 2.8% in July, according to data from the India ports association. But some argue that this drop could well be due to the heavy rainfall this season.
Credit offtake has also not picked up and bankers have been saying that RBI’s 20% credit offtake target for the year will not be met because of lack of demand. Year to date, credit growth has been only 4.3%.
“There is hope that investments will pick up but on the ground, there is no sign that capital expenditure plans are reviving,” said Partha Mukherjee, president of treasury and international operations, Axis Bank Ltd.
In the first quarter of this fiscal year, economic output expanded 8.8%.
“Corporate sales have been good and agriculture looks set to pick up, which means that the growth target is achievable,” Patnaik of Religare said. Both he and Chinoy of JPMorgan expect a push in government spending, especially in investment, to help meet these targets.
Even a slightly lower economic growth rate of 7.5% would still rank India among the best in the world.