New Delhi/ Mumbai: India’s expected slowdown in growth and investment may not be as severe as feared, which could mean that the central bank doesn’t have to slow down its campaign to tighten monetary policy to fight inflation, analysts said, although a liquidity shortage may still give it pause.
Meanwhile, the government said it was worried by the ballooning trade deficit, which is at its widest in nearly three years.
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Data released by the Central Statistics Office showed factory output based on a revised index with 2004-05 as the base year moderated to 6.3% in April, compared with 7.8% in the previous month. However, the moderation was slower than the earlier index with the base year of 1993-94. Based on the old series, the Index of Industrial Production (IIP) grew 4.4% in April.
Trade data, also unveiled on Friday, showed exports growing 56.9% to $25.9 billion (Rs 1.16 trillion today) in May, while imports grew 54.1% to $40.9 billion, leading to a trade deficit of $15 billion, the highest since August 2008.
Commerce minister Anand Sharma said the high trade deficit is a matter of concern. “It is because of the volatility in petroleum prices. Oil prices have skyrocketed because of a number of factors, including the developments of the last few months in the Middle East,” he said.
Commerce secretary Rahul Khullar said if the trade deficit averages $12-12.5 billion per month, the current fiscal may see it widen to $145-150 billion from $101 billion in the previous year. The unusual increase in imports, especially that of gold, which stood at $9 billion in May, surprised analysts.
This could be black money flowing into the country due to the fear of a crackdown on unaccounted funds stashed outside India, said an economist who didn’t want to be named.
Finance minister Pranab Mukherjee said the IIP figures were disturbing. “We need to wait for longer-term IIP growth to see the trend,” he added.
“The data shows industrial activity is slowing down, but not collapsing”, said Samiran Chakraborty, Standard Chartered Bank India research head.
Under the new IIP series, volatility of the index has declined significantly. Growth in capital goods, which is a sign of investment activity in the economy, is not showing any significant worsening unlike the earlier series, he said.
In contrast to the old series, growth in capital goods slumped from 28% in the first half of 2010-11 to 0.25% in the second half, while the new series shows growth in capital goods only moderated from 17% in the first half of the same fiscal to 14% in the second half of the year.
“The industrial slowdown story is not completely corroborated in the new IIP series,” Chakraborty said.
However, Deepali Bhargava, an economist at ING Vysya Bank Ltd, said it may be too early to say that the trend has decisively reversed. “Various high-frequency leading indicators such as smaller order books, higher inventory build-up, lower capacity utilization, moderating non-oil imports, and recovering excise duty collections are painting a mixed picture on investment,” she said.
Bhargava said slower environment and land acquisition clearances, together with the lack of availability of finance for infrastructure, may continue to impede investment in the next few quarters. “Moreover, a greater pass-through of higher interest rates is likely to impact the somewhat insulated consumption demand,” she added.
Growth in passenger car sales slowed to 15% in April compared with 25% in March, signalling slowing consumer demand.
The new index also shows growth in consumer goods was overstated in the old index, especially in consumer durables. Growth in consumer durables, pegged at 21% in 2010-11 in the earlier series, has now been revised to 7.3% for the same fiscal.
Under the revised index, the weight ascribed to manufacturing has been cut to 75.5% from 79.4%, while that of mining has been raised to 14.2% from 10.5% in the new series. Electricity is unchanged at 10.3%.
The new data may also lead to a revision in economic growth rates in previous years. Fiscal 2011’s fourth quarter gross domestic product data, which showed the economy growing at 7.8%, may also be revised upwards as manufacturing growth during the quarter has gone up from 5.5% in the old series to 8.5% under the new series.
The new series also shows that following the global economic crisis, the manufacturing sector contracted for seven months from December 2008 to June 2009. The earlier series showed positive activity in all these months. “This may lead to growth being pared down in 2008-09 and 2009-10,” Chakraborty said. The economy grew 6.8% in 2008-09 and 8% in 2009-10, as per current figures.
Since the latest data indicates that the slowdown may not be as severe as had been assumed, the Reserve Bank of India (RBI) may go in for another round of interest rate increases on 16 June, analysts said.
“We expect a 25 basis points (bps) increase in policy rates as controlling inflationary expectation remains the core objective of RBI,” Chakraborty said.
Citi India economists Rohini Malkani and Anushka Shah said in an advisory that RBI may be in its last quartile of tightening and expect a further 50-75 bps hike in rates with a 25 bps hike likely in its forthcoming policy review.
However, Devendra Dash, a senior dealer with Development Credit Bank Ltd, said RBI may have to press the pause button. “Bond yields have priced in lower growth and low revenue collection. Most of the participants in the market are expecting no rate hike on 16 June,” he added.
According to Harihar Krishnamurthy, head of treasury at FirstRand Bank, even as RBI has scope to hike rates by another 50 bps, this time the central bank may have to give it a pass. The system is suffering from a liquidity shortage and this may push up short-term rates anyway.
The bond market did not react much after the IIP numbers as, according to bond dealers, the current yields have already factored in a possible slowdown in the economy and in revenue collection. The yield on the most-traded 10-year paper fell only one basis point to 8.26% after the numbers were announced.
The 10-year bond yield closed at 8.23% against the 8.27% close on Thursday. Volumes are on the higher side at Rs 14,075 crore on RBI’s order-matching platform.
Graphic by Sandeep Bhatnagar/Mint
PTI contributed to this story.