New Delhi: Factory output contracted for the second straight month in January, triggering fears of more losses as the Indian economy slows, despite tax and interest rate cuts.
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The interest rate cuts have been made possible by slowing inflation. India’s wholesale price-based inflation eased to 2.43% in the week to 28 February, the lowest in at least six years.
The back-to-back contraction in factory output is the first in 16 years and poses a challenge to the ruling United Progressive Alliance in the coming polls where job losses could be one significant issue. Retail, or consumer price-based inflation, which is still high, could be another.
Analysts used that as one argument to dismiss the possibility of deflation, a phase when the price level steadily drifts downwards due to contraction of demand. They also said the new low for wholesale inflation—they project it could drop below zero—is a statistical blip.
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Data released by the Central Statistical Organisation (CSO) showed that the Index of Industrial Production (IIP) contracted by 0.5% in January from a growth rate of 6.2% during the same month a year ago; in December, revised numbers show the growth had contracted by 0.6%.
Separately, data released by the department of industrial policy and promotion showed that inflation as measured by the Wholesale Price Index has declined to a six-year low at 2.43% for the week ended 28 February, while inflation measured through Consumer Price Index for Industrial Workers (CPI-IW) remained in the double-digits at 10.45% for January, indicating that price inflation faced by consumers at the retail level remains high.
CSO’s revision of the December factory output number —from a contraction of 2% to a contraction of 0.6%—is being seen by some analysts as a sign that the industrial outlook isn’t as bleak as it looks.
“We expect January figure to be revised upward, as it was certainly a better month than December. Supply of credit has improved considerably in January. Demand in consumer durables has also picked up in mid-December due to (government) salary hikes. ...We expect in February, industrial output to grow at not less than 1.5%,” said HDFC Bank chief economist Abheek Barua.
Passenger car sales climbed for the first time in five months in February after lower auto loan rates spurred demand for vehicles made by Maruti Suzuki India Ltd and Hyundai Motor Co.
Manufacturing, which constitutes 80% of IIP, contracted by 0.8% in January, while the production of basic goods and intermediate goods contracted by 1% and 9.2%, respectively.
India’s chief statistician Pronab Sen said it is difficult to predict the nature of revisions in IIP as it is affected both by cyclical and seasonal reasons. “Usually the last quarter of the financial year is a dynamic quarter for industrial production. This may act towards improving output. However, as we are in a cyclical downturn, this may drag factory output into the negative zone.”
Sen added that if credit availability improved, then there might be a huge rebound in basic and intermediate goods.
Goldman Sachs, however, remained pessimistic about the outlook for the Indian economy in a report released on Thursday, after the factory output numbers were released.
A continuation of the downturn could trigger more job losses. At the end of December, the labour ministry had estimated that about half a million workers had lost jobs.
With little less than a month left for the general election to begin, politicians are either worried about retail inflation, or seeking to make an issue of it, depending on whether they belong to the ruling coalition or the opposition.
According to Yashwant Sinha, former finance minister and senior Bharatiya Janata Party leader, inflation will be a key factor in the elections that start on 16 April.
“What they (voters) see is how all this affects their pockets and there has been no marked relief on that count... Inflation is definitely going to be an issue because when you talk about price rise, you immediately strike a chord with the voters,” Sinha said.
Congress spokesperson Manish Tewari argued otherwise. “One year back, they (the opposition parties) were trying to make WPI inflation a headline issue. Now, they have changed tack. The fact of the matter is that inflation in real terms has come down, which includes food inflation. Even if they do bring up the inflation issue during polls, I don’t think it will work because it would be like flogging a dead horse.”
Meanwhile, with the inflation rate dropping below 3%, analysts are already forecasting that it will enter negative territory as early as the end of this month. They say this will have little impact in real terms as it is more of a statistical phenomenon.
Sen, who forecasts that there might be a negative inflationary scenario for three months, maintains that this will amount to nothing and will be due to a huge unseasonal spike in primary good prices last year.
Not everyone is convinced that a negative inflation means nothing.
HDFC Bank’s Barua said it could trigger another downward spiral in the stock markets and force banks to lower lending rates.
At the same time, he projects that a real decline in prices from last year’s level may begin consumer spending.
That could happen, said Sen.
Ruhi Tewari and Bloomberg contributed to this story.
Graphics by Paras Jain / Mint