India's Industrial production declines by 5.1%

[cir]

Reuters
New Delhi, December 12, 2011

India's industrial output contracted 5.1% in October from a year earlier, government data showed on Monday, much sharper than a median forecast in a Reuters poll for 0.5% fall.

Manufacturing output, which constitutes about 76% of the industrial production, fell an annual 6%, the federal statistics office said in a statement.


During April-October, industrial production expanded 3.5%. Output grew 7.8% in the 2010/11 fiscal year that ended in March, slower than the 10.5% clocked in the previous year.

COMMENTARY:

ROBERT PRIOR-WANDESFORDE, SOUTH-EAST ASIAN ECONOMIST, CREDIT SUISSE, SINGAPORE
"It's the sort of number that you would imagine would make them sit up and take notice. However, (RBI Governor Duvvuri) Subbarao has made it crystal clear he is still heavily focused on inflation, in that sense the November WPI number will be perhaps more important than this number.

"We think WPI, and the market now thinks, that WPI inflation is going to show its first meaningful decline in about 18 months, and that therefore this is going to be a very dovish week for India -- does that mean we are going to get a cut at the next meeting? I very much doubt it, I think they will want to see, a), if this is just a temporary blip and, b), they would want to see if they get further slowing in WPI inflation."

JAGANNADHAM THUNUGUNTLA, HEAD OF RESEARCH, SMC GLOBAL SECURITIES, NEW DELHI:
"The IIP numbers are a clear indication of the fact that the slowdown has taken deep roots in the Indian economy. Against this backdrop, I think expectations of 7% GDP growth this year would be very, very optimistic.

"Despite this, I expect the central bank to give some indication of rate cuts early next year rather than later this week. The stock market has been coping with so many headwinds and this adds to the overall macro-economic worries."

DARIUSZ KOWALCZYK, SENIOR ECONOMIST AND STRATEGIST, CREDIT AGRICOLE CIB, HONG KONG:
"The data shows weakening of the Indian economy. It should pressure down the INR and INR OIS rates, especially at the short end of the INR OIS curve. It increases the odds of a major shift in RBI language on Friday. We see rate cuts in 2012 but there is a small chance of a cut this week."

TIM CONDON, HEAD OF ASIAN ECONOMIC RESEARCH, ING, SINGAPORE:
"It is a lot worse than we expected. The nearly two years of monetary tightening is clearly being felt. While India may not be a manufacturing-driven economy, more data prints such as this would be a worrying sign. While we expect a status quo in terms of interest rates from the RBI this week, the pressure is clearly building on them to start easing."

BACKGROUND:

- India slashed its full-year growth forecast on Friday amid slowing domestic and global demand, with officials warning the government was facing a serious balance of trade problem and will have a tough time meeting its fiscal deficit target.

- The economy grew 6.9% in the quarter through September, its weakest pace in more than two years.

- The Reserve Bank of India (RBI), which reviews policy on Friday, is expected to pause its tightening cycle because of slowing growth, after raising rates 13 times since early 2010 to control inflation that has stayed above 9 percent for nearly a year.

- Headline inflation likely eased in November to 9.04% from 9.73% the month before as food prices fell to their lowest in nearly three-and-a-half years, a Reuters poll showed. The data is due on Wednesday.

- The RBI expects inflation to ease to 7% by March.

- Manufacturing sector expansion slowed in November as factory output grew at its slowest pace in nearly three years although export demand should provide some cheer for factories, a HSBC Markit survey showed.

- India's services sector expanded in November for the first time in three months as new business accelerated despite persistent inflationary pressures.

- Car sales rose 7% in November from the same month a year earlier, the first monthly rise in five, an industry body said on Thursday, as the industry rebounded strongly from the biggest fall in over a decade the month before.

- A slowing economy is squeezing federal finances and the government's ability to restrict the fiscal gap for the 2011/12 financial year at the budgeted level of 4.6% of gross domestic product.

 

[Daredevil]

High interest rates, slump in the demand due to global down turn, high inflation and lack of any new infrastructure are the reasons for the current economical debacle in India. This government is comatose with no authority to push reforms or manage the economy.

if there is no decrease in interest rates in the upcoming review of RBI, then things will pan out very bad for the market and the economy.

 

[Daredevil]

Industry shrinks, but don't blame euro. Our govt screwed up


If there are any lingering doubts that we are into a serious downturn, the October figures of the Index of Industrial Production (IIP) should dispel them conclusively.

A 5.1 percent drop in industrial growth is not a slowdown, but a serious contraction. Nor can it be explained as being the result of a base effect: that this October looks bad because last October we saw a high 11.3 percent growth.

It's nothing of the kind. Even if you compare this October with the previous month, there is a serious 3.3 percent sequential contraction.


How can growth fire when both investment and consumption are declining or stagnating? Reuters

So, we can now clearly say that October 2011 marks the watershed point where we have to raise fundamental questions about the sustainability of the short-term India growth story.

The numbers show growth being decimated across-the-board.

In October 2011, mining fell 7.2 percent (not surprising, given the scams), manufacturing by 6 percent. Only electricity rose – and one wonders why.

During the month, every broad economic segment declined: capital goods by a whopping 25.5 percent, intermediate goods by 4.7 percent, and consumer goods (both durables and non-durables) by around 1 percent.

The sharper decline in consumer non-durables (-1.3 percent against -0.3 percent for durables) shows that people are curtailing everyday expenses in general – and not just big-ticket expenses like TVs or fridges. Non-durables include everything from toothpaste and toiletries to other daily essentials.

How can growth fire when both investment and consumption are declining or stagnating? The October figures show that industry is not investing, and consumers are holding back.

This calls into question the assumption that 2011-12 will see even the 7.5 percent GDP growth promised in the government's mid-term review of the economy. We can now safely write off this prediction like all others before it. In fact, 7 percent is the best we can hope for, assuming agriculture and services hold up.

The government, of course, will blame it all on the eurozone crisis and external uncertainties, but the truth is only the rupee's recent fall can be linked to that unfolding story. Neither inflation nor slowing growth can be laid at Europe's door. Inflation especially.

Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, says India's post-Lehman approach has been to push growth through monetary and fiscal stimuli instead of reforms. Growth is spluttering because government has been unable to raise its own savings and contribution to investment.

In an article in The Economic Times, Sharma underlines the difference between China and India. While "a large increase in savings of the corporate sector funded the acceleration in India's investment rates in the 2000s, with household savings remaining stable at around 20 percent"¦the one difference has been the divergent performance of government finances. In China, the government saves a lot more than in India. Over the past year, corporate savings too have begun to decline in India due to factors including the global slowdown, and that helps explain the fall in both the domestic investment and economic growth rates."

As for inflation, which has forced the Reserve Bank to keep raising interest rates, Sharma debunks the government's claims that this is the result of faster growth and prosperity, rather than a sign of its own macroeconomic and reform failures.

He says: "Low inflation is a hallmark of boom periods and when prices do begin to rise it is often a sign that the good times are ending."

The government's mid-term report on the economy accepts that inflation is worse in India compared to other emerging economies due to "an unusual combination of domestic factors and structural reasons."

One wonders what these "unusual" combos are, unless it is political paralysis, excessive fiscal spending on populist schemes that don't deliver the goods, and complete inability to move the reform agenda forward.

Next Friday, the Reserve Bank of India will unveil its monetary policy. Apart from the IIP, it will also have the November wholesale prices index (WPI) data with it. The deceleration in exports – along with the commerce ministry's recent restatement of bogus export numbers – is already a reality.

If the WPI numbers show a significant fall, the RBI will surely start easing up by either reducing banks' reserve ratios and/or indicating rate cuts in the future.

But it won't do the trick. When an economy is in a serious downturn, rate cuts will not change the mood. Business will not start investing and consumers spending till they see optimism return.

That, unfortunately, is nowhere on the horizon in a scenario where Anna Hazare is gearing up for his next confrontation with an inept political establishment.