Agencies
: New Delhi
India
Asia 's
third-largest economy is struggling to contain its fiscal deficit, which
widened to 5.097 trillion rupees ($90.86 billion), or equivalent to 5.76
percent of its gross domestic product, in the 2011/12 fiscal year.
India
India is
sitting on a comfortable cushion of $300 billion in foreign reserves, so
comparisons with India
Industrial production growth rate slowed down
sharply to 0.1 per cent in April due to contraction in capital goods and dip in
manufacturing output, reflecting the sluggish state of the economy that may
prompt RBI to cut lending rates.
Growth in factory output, as measured by the
Index of Industrial Production (IIP), was 5.3 per cent in April last year.
The manufacturing sector, which constitutes
over 75 per cent of the index, grew barely 0.1 per cent, as against 5.7 per
cent in April 2011, according to the official data released today.
The capital goods output declined by 16.3 per
cent as against a growth of 6.6 per cent in the same month last year.
Mining output contracted by 3.1 per cent in
April, as against growth of 1.6 per cent in the same month a year ago.
The slowdown in industrial production is likely
to put pressure on the Reserve Bank to cut lending rates at its mid-quarterly
review on June 18.
However, consumer goods production showed a
faster growth rate of 5.2 per cent in April, compared to 3.2 per cent in the
same month last year.
The consumer durables segment also expanded
by 5 per cent in April, as against 1.6 per cent in the same month last year.
Power generation witnessed a slower growth of
4.6 per cent during April, compared to 6.5 per cent in the same month a year
ago.
In all, 12 of the 22 industry groups in the
manufacturing sector have shown positive growth during April as compared to the
same month a year ago.
High inflation and interest rates, a lack of
government initiative and the euro area debt crisis have weighed on Asia 's third-biggest economy for more than a year. Annual
GDP growth hit its weakest pace in nine years in the first three months of
calendar 2012.
Market reaction to the data was muted. The
rupee was changing hands around 56 per dollar, little changed from before the
data.
The yield on benchmark 10-year bonds was flat
at 8.31 percent compared with pre-data levels and stocks pared mild losses to
trade flat on the day.
The slump in January-March GDP growth to 5.3
percent sparked alarm in industry and calls for the government and the central
bank to take action to revive the fortunes of an economy that was expanding
closer to 10 percent a year before the global financial crisis.
That has spurred expectations the Reserve
Bank of India
However, those expectations will be further
moulded on Thursday by May wholesale inflation data.
Finance Minister Pranab Mukherjee forecast on
Monday a turnaround in India 's
growth prospects after Standard & Poor's said India
Slowing GDP growth and political roadblocks
to economic policymaking are just some of the factors pushing up the risk that India
COMMENTARY
ABHEEK BARUA, CHIEF ECONOMIST, HDFC BANK, NEW DELHI
The data clearly points to industrial growth
being extremely weak, and it is in clear need of monetary as well as fiscal
support. I think industrial growth needs monetary stimulus irrespective of what
the headline inflation number shows day after tomorrow.
There is a case for a sharp move from the
Reserve Bank of India
The industrial growth is looking very weak
irrespective of legitimate skepticism on the veracity of IIP data. We are
seeing sustained slower growth in industry, which is becoming broad-based.
A lot of what Standard & Poor's said was
valid, but the timing was misguided and misplaced. The rating agency could have
avoided this in the middle of turmoil that India
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA
There was absolutely no reason for any
improvement in the data given the ongoing investment slowdown and imported inflation
due to the rupee depreciation. The RBI has no alternative but to reduce policy
rates by 50 basis points, as there is no space left for any fiscal stimulus.
SUJAN HAZRA, CHIEF ECONOMIST, ANAND RATHI
SECURITIES, MUMBAI
I think the RBI needs to boost liquidity at
this point, otherwise rate cuts will remain symbolic. The central bank should
cut the cash reserve ratio by 50 basis points along with a 25 basis points cut
in repo rate.
We were expecting the main weakness to come
in from the services sector in FY13. But today's manufacturing print shows that
it may also be a cause of concern.
RAMYA SURYANARAYANAN, ECONOMIST, DBS , SINGAPORE
On a sequential basis output expanded by 5
percent but this is too little as it comes after a generally weak past 9 months.
This is why the YoY growth rate is flat. In particular in April, weakness in
mining and capital goods has dragged industrial output lower. Meanwhile,
consumption demand is also moderating possibly as the uncertain global outlook
and domestic challenges combine to cast a shadow on the job market.
SHUBHADA RAO, CHIEF ECONOMIST, YES BANK,
MUMBAI
It is a very disappointing number. While
consumption is barely holding up, the worrying factor is a 10-month consecutive
contraction in intermediate goods. Capital goods being an unpredictable data
series continues to surprise us on the negative. We have penciled in a 25 basis
points repo rate cut at the policy.
Current liquidity conditions do not warrant a
cut in CRR as OMO (open market operation) is expected to be the preferred route
though we expect a cut in CRR by 100 bps in the second half of FY13.
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK
CAPITAL, MUMBAI
The lower data is largely a reflection of
seasonal adjustment in the beginning of the fiscal year & partially a weak
print in the core output. However, the surge in indirect tax collection figures
coupled with Q1 advance tax collection would give a clear picture of uptick in
the production activities.
A fiscal action would count more productive
in reviving the growth sentiment in the current phase rather than a temporary
sweetener in terms of a further rate cut. This is totally a year beginning
adjustment not indicating any concrete picture.
SONAL VARMA, ECONOMIST, NOMURA, MUMBAI
The momentum is very weak and the investment
side is seeing deceleration. This reading increases the probability of a 50
basis points cut in the repo rate, but our base case is of a 25 basis points
cut.
What S&P has done is a warning shot,
because even a month after the downgrade, we have not yet seen concrete action
from the government.
UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK,
MUMBAI
The IIP figures reaffirm the weak activity as
high interest burden and uncertain regulatory environment continues to shelve
investment plans. With sharp deceleration in the growth momentum, we expect RBI
to cut the repo rate by 25 bps in the forthcoming meeting.
DEVEN CHOKSEY, MANAGING DIRECTOR, K.R.
CHOKSEY SECURITIES, MUMBAI
Tightening of rates earlier have impacted GDP
and IIP numbers. Inflation may not come down, but rate cut is a must now
because we are really lagging action.
I wouldn't be surprised if RBI cuts rates and
CRR (cash reserve ratio) by 50 basis points each at the policy next week.
A PRASANNA, ECONOMIST, ICICI SECURITIES
PRIMARY DEALERSHIP, MUMBAI
I think this data will call for a policy
response from the RBI as this eventually also has an impact on GDP. Given core
inflation is well behaved, I now expect RBI to cut rates by 25 basis points in
June. Looking at the rupee, equity markets, things are pretty bad irrespective
of any downgrade by S&P. Downgrade is just a cosmetic change.
But I think this data is distorted. The GDP
and IIP data shows exaggerated slowdown. If this kind of data continues, it
will have an impact on sentiment and will be self-fulfilling.
MARKET REACTION
Markets barely reacted to the industrial
output data, given widespread expectations for a weak expansion.
The rupee was in range at 56 to the dollar,
little changed from before the data. The benchmark 10-year bond yield was also
flat at 8.31 percent from beforehand.
Stocks pared mild losses to trade flat, with
the benchmark BSE index unchanged on the day.
BACKGROUND
- Standard & Poor's said on Monday
that India
- The Reserve Bank of India
- Falling global oil prices as well as
declining core inflation and growth in India
- India
Mutual Funds Check for top funds
FACTBOX-Key political risks to watch in India
India's economy grew at its slowest pace in
nine years in the first three months of 2012, dragged by an extended euro zone
crisis and policy paralysis at home, while the coalition government is under
tremendous strain from scandals and rebellious coalition partners.
Some economists warn that unless the
government acts to reverse the growth slump, India
The risk of Prime Minister Manmohan Singh's
second term being cut short before a general election due in 2014 is low, but
cannot be ruled out.
The failure of Singh's Congress party in
state elections in early March have put him and the party under even more
pressure.
RATINGS (Unchanged unless stated):
S&P: BBB-
MOODY'S: Baa3
FITCH: BBB-
The cost of insuring against default on
5-year sovereign debt traded at 106 basis points in mid-June, having risen
around 30 points since late March.
Following is a summary of key political risks
in India
POLICY PARALYSIS
After lurching from crisis to crisis for more
than a year, the policy paralysis of Prime Minister Singh's government and its
failure to pass significant reforms to sustain growth are blamed by economists
for the slump in GDP growth. The figure fell to 5.3 percent in the first three
months of this year from 9.2 percent in the same quarter of 2011.
Since it won a second term in 2009, the
government led by Singh's Congress party has taken no major policy initiatives
to further the economic liberalisation he pioneered.
Instead, a seemingly endless series of
corruption scandals, and coalition allies that block unpopular bills, have
frozen the government into inaction.
Rahul Gandhi, son of current party leader
Sonia Gandhi, utterly failed to deliver a promised comeback for the Congress
party in crucial state elections in early March, casting fresh doubt on his
capacity to become the next member of a dynasty to lead the country.
The party's flop in Uttar Pradesh has reduced
Singh's scope to relaunch reforms and reverse a slowdown in economic growth.
Anger at Singh's poor performance is rising,
with some talk in the Indian media that he will not survive as prime minister
until 2014 elections.
That is unlikely, and the government could
probably also muster the support to survive a no-confidence vote. Also helping
the government is the lack of appetite among the opposition Bharatiya Janata
Party (BJP) for a general election before 2014. Despite Singh's woes, it is by
no means clear the BJP has won over sufficient voters to its Hindu nationalist
cause.
Top government advisors are publicly calling
for the leadership to tackle politically unpopular reforms between the July
presidential selection and key state elections later in the year.
What to watch:
- Protests against Singh and the Congress,
and the progress of attempts to pass laws through parliament.
- Economic data, especially any signs that
GDP growth as slowing further, which would exert even more pressure on the
government.
FAILURE TO REFORM
Investors says the government's priorities
should be cutting subsidies for fuel, fertiliser and food to fix the country's
fiscal credibility, tackling regulatory uncertainty, and reducing the high cost
of doing business.
In May, state oil companies said they would
raise the price of petrol by about 11 percent, the first increase in six
months, in an effort to recover losses inflicted by higher global oil prices
and a plunging rupee.
Only days later, the refiners agreed to a
partial rollback of the increase as the government responded to a public outcry
that included the burning of effigies of Singh and Gandhi, a policy reversal
that suggests the government is highly unlikely to pass the tough reforms India
needs to speed up its pace of growth again.
As ever, India Europe could exacerbate capital outflows and further trim
demand for Indian exports.
What to watch:
- The Reserve Bank of India
- Any more moves to roll back - or to press
ahead with -subsidy reform, and how the public responds.
No comments:
Post a Comment