New Delhi: In another ominous reminder that the economy has flatlined, industrial output remained almost unchanged, even as there was fresh evidence that investment levels in the economy were decelerating rapidly.
A spate of economic data—including a nine-year quarterly low in economic growth last fiscal, single-digit export growth in April, and demand for cars dropping to a seven-month low in May- had already signalled a broader slowdown in economic activity in Asia’s third largest economy.
The data for April, the first month of the current fiscal, reported marginal growth in the Index of Industrial Production (IIP) of 0.1%, while capital goods growth contracted for the second consecutive month, by 16.3%.
Mint’s Asit Ranjan Misra says, The latest IIP figures reveal a dismal picture of the economy and that the govt. needs to take strong steps to promote investment in the country
It came a day after international credit rating agency Standard and Poor’s warned that India could become the first of the so-called BRIC (Brazil, Russia, India and China) economies to lose its investment-grade status, less than two months after cutting the rating outlook for the country due to growth slowing, external risks and poor governance leading to reforms stalling.
In a similarly grim prognosis, the World Bank’s Global Economic Prospects 2012 report released on Tuesday said growth in India was particularly weak due to monetary policy, stalled reforms and electricity shortages, which, along with fiscal and inflation concerns, cut into investment activity. The report said India will see growth increasing to 6.9%, 7.2% and 7.4% in fiscal years 2012-13, 2013-14 and 2014-15, respectively.
In a candid admission, finance minister Pranab Mukherjee said the IIP data was disappointing. “Though IIP is positive this month, unlike in March, where it was negative, it is no consolation. Industry has not yet picked up. Negative sentiments are still there. We shall have to take some steps. Though some sectors have done well, the performance of capital goods is disappointing,” he said.
Pronab Sen, principal adviser in the Planning Commission, said he was not surprised by the slowdown in investment activity. “For two years, RBI (Reserve Bank of India) has been swimming against the tide, getting nobody’s help to fight against inflation. Although the problem was on the consumption side triggered by a consumer boom in the rural area, RBI has been trying to find a solution by squeezing investment.”
Analysts believe the latest industrial data only emphasized the need for the Congress-led United Progressive Alliance (UPA) to mount a rearguard action to reverse current trends, especially the let-up in investment. The stock markets believe the latest numbers could force the hand of the central bank and that it may announce another rate cut in its mid-quarter review due on 18 June. Not surprisingly, therefore, the 30-share bellwether Sensex index of BSE rose 1.17% to close at 16,862.80 points on Tuesday.
Rajeev Malik, senior economist at CLSA Singapore, said in a report that the latest industrial production data does not alter the basic lopsided nature of India’s abnormal cycle in which consumption is holding up, while investment remains in the doldrums because of government inaction. “We reiterate our view that constructive government action and sustained low inflation are needed for an investment-led growth upturn,” he said.
During April, while manufacturing grew at 0.1%, mining contracted 3.1% and electricity production grew 4.6%. Going by the use-based classification of sectors, basic goods grew 2.3%, while capital goods and intermediate goods contracted 16.3% and 1.4%, respectively. Consumer durables and consumer non-durables recorded 5% and 5.4% growth, respectively, with the overall growth in consumer goods being 5.2%.
The contraction in capital goods is ringing alarm bells on investment levels in the economy, especially if the sharp surge in non-performing assets (NPAs) at commercial banks over the last two years is considered. Together, they indicate a diminishing production capacity in the economy, suggesting that the loss in growth momentum may be worse than what has been presumed. In turn, the rise in NPAs is also limiting the ability of commercial banks to extend new lines of credit.
Gross NPAs in the banking system in 2011-12 amounted to 2.8% as a percentage of advances (around Rs 1.27 trillion) against 2.27% in the corresponding year-ago period, according to a research report by brokerage firm Angel Broking Ltd.
The situation is unlikely to improve, with public sector banks going in for large-scale restructuring. Rating agency Crisil Ltd said in a report that the pressure on Indian banks’ asset quality is likely to continue in 2012-13 on the back of an increase in loan restructuring, with gross NPAs likely to touch 3.2% by March 2013.
Mukherjee, while addressing public sector bankers on Tuesday, said that though rising NPAs need to be curbed, “this should not choke the flow of credit to productive sectors”.
While analysts expect a repo rate cut in the forthcoming monetary policy review, banks and the finance ministry are rooting for a cut in the cash reserve ratio (CRR) to increase liquidity in the system and to boost credit flow. “We expect RBI to cut CRR by 100 basis points (bps). It will ease liquidity significantly and lower interest rates in the system,” said Pratip Chaudhuri, chairman of State Bank of India. “A cut in the repo rate is meaningless because it is more symbolic. The impact will not be very substantial.”
The repurchase, or repo, rate is the rate at which RBI injects liquidity into the system. CRR is the proportion of deposits that commercial lenders in India must keep with the central bank as cash to protect the deposits. A basis point is one-hundredth of percentage point.
State-run banks expect RBI to cut CRR by 100 bps, and as the owner of public sector banks, the ministry expects the central bank to cut rates, D.K. Mittal, secretary in charge of financial services in the finance ministry, said while addressing public sector bankers on Tuesday. “But what RBI does is its own decision,” he said.
Citigroup India economists Rohini Malkani and Anushka Shah said in their report that RBI will cut interest rates by at least another 25 bps. In April, RBI had reduced the key interest rate by 50 bps.
However, Sen said it will not be easy now to revive the corporate mood just by RBI action because the global situation has worsened.
Sen said rapid monetary easing is possible only if RBI thinks inflationary expectations have been countered. “That is a call RBI has to take,” he added.
Anup Roy in Mumbai contributed to this story.