New Delhi: Gloomy macroeconomic data released on Friday set back hopes for an early recovery in Asia’s third largest economy, jolting a government that’s already struggling to contain the rupee’s rapid decline.
After four consecutive months of growth, factory output contracted 1.6% in May while merchandise exports shrank 4.6% to $23.8 billion in June, reflecting the weakness in external demand. The retail inflation rate inched up to 9.87% in June compared with 9.31% in May, led by higher prices of vegetables and protein-rich foods.
Adding to the gloom, car sales in India fell by 9% in June to 139,632 units, industry body Society of Indian Automobile Manufacturers said on Friday. Rising ownership costs and sluggish economic growth have deterred potential car buyers from going ahead with purchases, resulting in the eighth consecutive monthly decline in vehicle sales.
The latest set of data deepens economic worries for the Congress-led United Progressive Alliance government and complicates the situation for the Reserve Bank of India (RBI), which is walking a tightrope between needing to stimulate economic growth while curbing inflationary pressures and shoring up the rupee.
The improvement seen in macroeconomic indicators in the past few months seems to have stalled, said Samiran Chakraborty, head of India research at Standard Chartered Plc’s India unit.
“The trend reversal in most of the data is worrisome,” he said, adding that though inflationary pressures are expected to be a temporary phenomenon because of expectations of a good kharif crop, few greenshoots are visible on the economic front.
Chakraborty said he does not expect any rate cut in the next monetary policy review by RBI due on 30 July.
As the rupee depreciated against the dollar, the central bank pressed the pause button in its policy of monetary easing last month, leaving policy rates unchanged after three cuts by 25 basis points each earlier in the year. A basis point is one-hundredth of a percentage point.
The Indian currency has been the worst performer against the dollar since US Federal Reserve chairman Ben Bernanke suggested in May that the US may start a gradual withdrawal of monetary stimulus, starting in September, should the world’s biggest economy stay on the expected course of recovery.
In June alone, the rupee tumbled 4.9%, making it the worst performer among 78 global currencies, according to Bloomberg data, as investors pulled money out of Indian stocks and bonds. A falling rupee will also lead to higher commodity prices, which could throw the fiscal calculations of the government out of the window.
The Indian economy has been struggling to accelerate after expanding 5% in the year ended 31 March, the slowest pace in 10 years, as high borrowing costs intended to douse inflation hurt corporate investment and consumer spending, and weak external demand curbed export growth.
The finance ministry expects growth to exceed 6% in the current fiscal year.
The International Monetary Fund (IMF) on Tuesday lowered India’s growth forecast for 2013-14 to 5.6% from the 5.8% it projected in April, holding that the risks of a longer downturn in emerging market economies had increased because of domestic capacity constraints, slowing credit growth and weak external demand.
IMF cautioned that while old risks such as a protracted recession in the euro area remain, new threats have emerged in the emerging markets because of the anticipated unwinding of monetary policy stimulus by the US, which may lead to sustained capital flow reversals.
Before jumping to any conclusion on the impact that emerging risks will have on this year’s growth, the effect of higher government expenditure on public consumption has to be factored in, said Kotak Mahindra Bank Ltd chief economist Indranil Pan, as a raft of state elections this year pave the way for a general election in 2014
On Friday, chief economic adviser Raghuram Rajan held consultations with foreign bankers on the possibility of selling overseas sovereign bonds to shore up foreign exchange reserves to stabilize the rupee and contain the worsening balance of payments situation.
“They (have given) us a lot of suggestions, including sovereign bond issue. All options are on the table and we will examine as and when the need comes,” Rajan told reporters.
Finance minister P. Chidambaram and trade minister Anand Sharma are currently trying to woo investors in the US. The government has started a consultation process to increase foreign direct investment caps across sectors including telecom, multi-brand retail and media, to increase long-term capital inflows.
On Friday, some measure of relief was provided by a narrowing of the trade deficit. In June, India’s trade deficit shrank to $12.2 billion from $17.8 billion a month ago, as curbs put on gold imports by the central bank and the government showed results. Gold imports dropped sharply to $2.5 billion in June from $8.4 billion in May.
Reuters contributed to this story.