New Delhi: Even as the macro data continues to paint a grim picture of the Indian economy, analysts are hoping the situation won’t get any worse.
However, with both factory output for November and merchandise exports for December contracting, pressure will intensify on central bank governor D. Subbarao to cut interest rates later this month, ahead of the Union budget in February.
After a strong rebound in October, when it grew 8.3% on the back of a low base, the Index of Industrial Production (IIP) contracted 0.1% in November due to the Diwali holidays. Non-oil imports contracted 0.87% in December, improving from a contraction of 17.8% in June, pointing towards a slow recovery in domestic demand.
The government released IIP and trade data on Friday.
The Reserve Bank of India (RBI) is scheduled to review its monetary policy on 29 January. The central bank has indicated it will reverse its monetary tightening cycle and start cutting policy rates. This is the first policy review after deputy governor Urjit Patel was appointed on 2 January. Patel’s remit includes monetary policy.
In November, manufacturing grew 0.3%, while electricity registered 2.4% growth. The mining sector contracted 5.5% in the month.
Attributing the IIP decline to statistical reasons, Planning Commission deputy chairman Montek Singh Ahluwalia said the economy had bottomed out and that the steps taken by the government to improve investor sentiment will yield results in the coming months.
“This data does not contradict the proposition that the economy has bottomed out. It now needs to move upwards,” Ahluwalia told reporters in New Delhi. “You need to wait to see what December is like.”
C. Rangarajan, chairman of the Prime Minister’s economic advisory council, expressed hope RBI will take into account various factors, including the falling IIP numbers, before taking a call on interest rates. Rangarajan is a former central bank governor.
In the first eight months of the fiscal (April-November), IIP grew 1%, compared with 3.8% in the year ago. Growth in Asia’s third largest economy has been slowing, hitting a nine-year low of 5.3% in the quarter ended March before rising slightly to 5.5% in the following quarter. High inflation has forced RBI to keep rates unchanged, crimping investment and consumer spending.
October and November data should be considered together to weed out the seasonal effect and better gauge industrial activity, Moody’s Analytics said in a research note.
“Taken together, we can discern a small acceleration in India’s industrial activity over the past couple of months. This is mostly in India’s consumer sector, which has picked up ever so slightly,” it said. Consumer durables grew 1.9% in November compared with 10.4% in the same month a year ago.
It further said the corporate sector may have improved a little as well, but remains quite weak. “Until we see a sustained pickup in business sentiment and investment, the economy will continue to operate below capacity,” Moody’s said.
The volatile capital goods segment indicates investment demand contracted 7.7% during the month along with the intermediate group, which shrank 1.1%.
Both the consumer goods and basic goods segments showed weak growth of 1% and 1.7%, respectively.
Thirteen out of the 22 industry groups in the manufacturing sector contracted in November from the corresponding month of the previous year.
The industry group “publishing, printing and reproduction of recorded media” contracted the most at 22.1%, followed by a 21.8% decline in “office, accounting and computing machinery” and 18.9% in “wood and products of wood and cork except furniture; articles of straw and plating materials”. On the other hand, the “electrical machinery and apparatus” segment grew 25.1%, followed by a 15.7% expansion in “luggage, handbags, saddlery, harness and footwear; tanning and dressing of leather products” and 15.3% in “radio, television and communication equipment and apparatus”.
Data for October and November indicate that industrial activity has stabilized, said Samiran Chakraborty, head of India research at Standard Chartered Bank.
“There is no rapid recovery happening as yet. It needs some amount of consolidation before recovery happens,” he added.
Unless there is a nasty surprise in inflation data for December, to be released on Monday, RBI is expected to cut the repo rate by 25 basis points, Chakraborty said. The repo rate is the rate at which the central bank lends to commercial banks. A basis point is one-hundredth of a percentage point. Inflation measured by the Wholesale Price Index eased to a 10-month low of 7.4% in November from 7.45% in the previous month.
The pace of policy rate easing will be determined by the pace of inflation.
“The government is expected to reduce its subsidy burden by raising fuel prices. While this is a positive for the fiscal health of the economy, it will have an inflationary effect. If inflation starts picking up again, it will reduce RBI’s appetite for a further rate cut,” Chakraborty added.
Data separately released by the commerce department showed India’s merchandise exports contracted for the eighth month in a row in December, dropping 1.9% to $24.88 billion on a persistent decline in demand for Indian goods in the US and Europe. Imports rose 6.3% to $42.5 billion, leading to a trade deficit of $17.7 billion, widening from the year-ago $14.7 billion, but down from $19.3 billion in November.
Exports in the first nine months of the fiscal contracted 5.5% to $214.1 billion, while imports fell 0.71% to $361.3 billion.
During the fiscal till December, only drugs and pharmaceuticals showed positive growth—with a rise of 10.7%—in the top exporting sectors. Among imports, only petroleum registered a growth—of 12.1%—in the same period. Most sectors showed signs of recovery in December, except for textiles, commerce secretary S.R. Rao said. “We hope this (recovery) trend continues in coming months,” he said.
Rohini Malkani, economist at Citigroup India, said she expects exports and imports to contract by 6% and 4%, respectively for the fiscal year to March. “This would result in India’s trade deficit coming in at $184 billion, similar to levels seen in FY12,” she said.
PTI contributed to this story.