The stock market crashed, liquidity evaporated and the rupee sunk, but there was some comfort in the hope that the economy, although slowing, wasn’t about to fall off a cliff.
That hope died on Friday. If August industrial production numbers are correct, the malaise has already spread far and wide into the real economy.
Most economists are of the view the figure is an outlier, caused in part by a high base. It’s also true the production of commodities such as cement may have been hit by floods. Export growth, growth in non-oil imports and the Purchasing Managers’ Index also lend support to the view the August numbers exaggerate the downside.
The big worry, however, has been the fall in electricity output to 0.8%, compared with 4.5% in July. Analysts say there are severe problems, both with hydropower and coal availability, which means it’s unlikely to be a one-off fall. Also, the liquidity crunch has started to take a toll, affecting funding for projects.
Also See Flight To Safety (Graphic)
If the August numbers are correct, it would mean terrible results by manufacturing companies in the September quarter, which would lead to further cuts in earnings estimates and a deeper de-rating of the market.
Incidentally, Friday’s market saw a flight to safety among banks. While investors abandoned private sector banks such as Yes Bank Ltd (down 20.7%), ICICI Bank Ltd (down 19.7%), Axis Bank Ltd and Indusind Bank Ltd, they flocked to public-sector lenders such as Canara Bank (up 3.87%), State Bank of India and Oriental Bank of Commerce.