The story so far has been that India’s growth is falling because of a significant drop in investment demand, on the one hand, and a decline in exports, on the other. Consumption demand was expected to hold up rather well, partly because the rural sector was insulated from the global mess and partly because of the goodies doled out by the government in the shape of debt relief to farmers and a hike in pay for civil servants. But if the December industrial production numbers are to be believed, consumption demand too has come a cropper. All engines of the economy are now stalling.
When the consumer goods index fell by 2.2% in October, analysts pointed to the holidays during the month. But there are no such excuses for December’s 2.7% fall in the consumer goods index. The three-month average of growth in consumer goods production during October to December is just 2.4% and it’s difficult to understand how the government expects private consumption growth to be 7% in the second half of the current fiscal, as its advance estimates show. Much of the slowdown has been in consumer durables, but growth in staples too has been flat in December. And with manufacturing as measured by the Index of Industrial Production (IIP) growing at 3.3% between April and December and with average growth during the October-December period at a negative 1.8%, how on earth is it going to meet the government’s advance estimates of 4.1% growth for the full year? Growth in the capital goods index has been a comparatively high 4.2% in December, but this is a very volatile series. The average growth in capital goods in the October-December period has been 2.3%, so there’s little to choose between it and the growth in consumer goods.
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The contraction is also spreading across sectors. Of the 17 broad industry groups that make up the IIP, only seven showed growth in December. These were beverages and tobacco; wool, silk and man-made fibres; textiles; non-metallic mineral products; basic metal and alloys; metal products and parts and “others”. In November, as many as 10 out of the 17 industry groups had shown growth. It’s true, though, that one reason for the very poor showing by the IIP in December was a high base in December 2007. That will be remedied by the lower base in January and February 2008. But with bank credit contracting in the first fortnight of this year, the signals for industrial growth in January are not good.
That’s made worse by the fact that, although inflation has been falling steadily, the cost of borrowing for companies has gone up because of the sharp rise in government borrowing. To illustrate, 10-year bonds of the Power Finance Corp. were being traded at 8-8.15% at the beginning of January. They were traded at 9.20-9.25% last Wednesday.
To sum up, in view of 1) the deteriorating industrial climate, 2) the inability of the government to provide any meaningful fiscal push, 3) the higher cost of corporate borrowing, 4) the sharp drop in demand for consumer durables and, 5) the fall in inflation, the sooner the Reserve Bank of India cuts rates the better.
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Graphics by Sandeep Bhatnagar / Mint