BackIIP shrinks for second straight month in Nov, trade deficit narrows
The contraction by 2.1% from a year earlier comes even as mining production recovers, while trade deficit narrows to $10.14 billion
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New Delhi: India’s factory output shrank for a second straight month in November, threatening economic recovery ahead of the general elections expected to take place in April-May. But a lower trade deficit in December and the resultant drop in the current account deficit is expected to provide support to the volatile rupee.
The index of industrial production (IIP) contracted 2.1% in November, mostly due to a 21.5% dip in output of consumer durables despite the festive season. Analysts polled by Reuters had predicted industrial output to grow 1%.
The manufacturing sector, which has a weight of 75.5% in the IIP, contracted 3.5% in November, even as mining and electricity production expanded at 1% and 6.3% respectively.
In terms of industries, production in 10 of the 22 industry groups in the manufacturing sector contracted in November. The industry group ‘Radio, TV and communication equipment and apparatus’ posted the biggest contraction (-42.2%), followed by ‘office, accounting and computing machinery’ (-27.5%) and ‘furniture; manufacturing’ (-19.5%). There are no signs of a turnaround in industrial activity as yet, analysts said. Slowing economic growth, high inflation, a drop in consumer spending and high borrowing costs, together with delayed government approvals, have forced companies to put projects on hold. Economic growth averaged 4.6% in the first half of the current fiscal year after slumping to 5% in the last fiscal—the slowest pace in 10 years.
“We are in a flat bottom on growth which is getting extended," said Samiran Chakraborty, head of India research at Standard Chartered Bank. It is quite possible that investors are in a wait and watch mode because of the ongoing political uncertainty."
Chakraborty said the expectation that rural demand would pick up has not played out. “Demand destruction could be taking place with lag effect due to past monetary tightening. It’s no more only investment slowdown. It has spread into consumer sectors as well," he said.
Moody’s Investors Service warned on Thursday that if the combination of low economic growth and high inflation persists beyond the next few quarters, the Indian financial system’s ability to absorb rising government debt could diminish significantly, potentially weakening the country’s sovereign credit profile.
“Thus, growth, inflation, interest rate, and fiscal policy trends over the next twelve to eighteen months will determine whether domestic financing conditions will remain supportive of the sovereign credit profile over the next three to five years," the credit assessor added.
India’s sovereign rating could be downgraded to junk status next year if the government, in the run-up to the general election due by May 2014, does not take measures to revive stalled structural reforms and economic growth and lower the stress of subsidies on state finances, Standard and Poor’s said in November.
Separate data released by the commerce ministry showed India’s trade deficit narrowed to $10.14 billion in December from $11 billion in November as imports contracted for seven months in a row even as export growth fell to a six-month low. Merchandise exports rose 3.49% year-on-year to $26.35 billion, slowing from a 5.86% pace in November. Exports growth slowed mostly due to an unplanned shutdown of Reliance Industries Ltd factories for maintenance which led to a contraction in petroleum exports by 16% to $4.8 billion, commerce secretary S.R. Rao told reporters.
Imports fell 15.25% to $36.49 billion in December, led by a 68.83% drop in gold and silver imports. Gold and silver imports fell to $1.77 billion in December due to measures taken by the government to curb imports of the yellow metal.
The December trade data suggests that the current account deficit, or CAD, in the third quarter (October-December) is likely to remain broadly unchanged from the second quarter (July-September) level of 1.2% of gross domestic product (GDP), said Shubhada Rao, chief economist at the Yes Bank.
“Growth in Indian exports is outpacing some of the regional peers and at the same time, much warranted contraction in imports continues to support the outlook for India’s current account deficit. We now believe that 2013-14 CAD would be lower than earlier anticipated, in the range of $35 billion to 40 billion," she said.
Rao said the US Federal Reserve would wind down asset purchases at a gradual pace, with no heavyweight impact on CAD financing for India. “In international markets, agenda has shifted from “timing of the taper" to “pace of the taper". Markets are watching out for each set of data releases from the US, as a clue to understand monetary policy dynamics," she wrote in a report.
“Owing to correction in vegetable prices, inflation in December is expected to come off, compared to November levels. However, it is the extent of correction that would be important for RBI’s next decision," she added.
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