Surprise industrial slump adds to India's economic woes

NEW DELHI Thu Aug 9, 2012 5:37pm IST

1 of 3. An employee inspects the spinning wheel to roll power wires at the Kei Industries, one of India's leading electrical equipment manufacturers at the industrial estate of Bhiwadi, in Rajasthan August 6, 2012.

Credit: Reuters/B Mathur

NEW DELHI (Reuters) - India's industrial output fell for the third time in four months in June, adding to pressure on new Finance Minister Palaniappan Chidambaram to move quickly and pull Asia's third-largest economy from its worst slowdown in almost a decade.

The manufacturing-led slump provided further ammunition to the slew of private economists who downgraded their growth outlook for India this week, citing the impact of a worsening drought on farming and political hurdles to economic reform.

Chidambaram called the numbers "disappointing," and said there was a need to remove supply bottlenecks and raise production across the economy.

"We intend to find practical solutions to the problems that impede higher production or output in the coal, mining, petroleum, power, road transport, railway and port sectors," Chidambaram said in a statement responding to the data.

Industrial output shrank 1.8 percent, dragged down by a deep dip in manufacturing, the data released on Thursday showed. The number was lower than a forecast of 1 percent growth in a Reuters poll and sharply lower than 9.5 percent growth a year earlier.

"Data will pile pressure on the new finance minister to jump start the reform process and revive investment interest, which is likely to be a key drag on overall growth heading into H2," said Radhika Rao, an economist at Forecast PTE in Singapore.

Capital goods, a key investment indicator that has shown growth only once in the past 10 months, slumped 27.9 percent in June, the data showed.

The Sensex edged lower on Thursday after the industrial output data. The index ended down 0.23 percent.

India's interest rates are among the highest in major economies and the contraction renewed c alls for the Reserve Bank of India (RBI) to lower them at a September 17 policy meeting, setting up a potential clash as the central bank has been clear a rate cut will only happen if inflation eases.

"There is a strong case for the RBI to cut interest rates further at least by 50 basis points immediately so as to encourage investments," said R.V. Kanoria, president of the Federation of Indian Chambers of Commerce and Industry.

GDP growth faltered to a nine-year low of 5.3 percent in the quarter ended in March, with corporate investors deterred by the high interest rates and a policy gridlock. GDP data for the quarter ended June is due to be released on August 31.

DROUGHT WORRIES

Several economists this week cut their full-year growth forecast for India to around 5.5 percent -- which would be the slowest rate in 10 years.

On Monday, Chidambaram promised a stable and fair tax regime to regain investors' confidence, but sceptics said it would not be easy to put the economy back on a high growth path and stabilize government finances.

Economic reforms are stalled on fears of a political backlash to steps such as allowing foreign supermarkets into India, while a drought in some parts of the country makes it harder to cut fuel subsidies blamed for a widening fiscal deficit.

Manufacturing, which constitutes about 76 percent of industrial production, shrank an annual 3.2 percent from a year earlier. The sector has been knocked by shrinking exports to recession-hit Europe and slowing U.S. economy.

Auto, industrial machinery, electrical and electronic equipment and sugar production led the slowdown in manufacturing, according to the data.

India's exports fell 5.45 percent to $25.1 billion in June, after recording strong growth for much of the last year.

On Tuesday the government said it was considering lifting import taxes on sugar, a step that could reduce inflationary pressures that keep lending rates by commercial banks at more than 10 percent for a majority customers. But analysts said rising food prices would limit space for monetary easing.

The RBI remains a hawkish outlier among central banks -- China, Brazil and South Korea have eased monetary policy in recent weeks to bolster flagging economies.

India's industrial output data is volatile but is considered a barometer of GDP growth. May's figure was revised to 2.5 percent from 2.4 percent, the data showed.

The HSBC manufacturing Purchasing Managers' Index (PMI), which gauges business activity at India's factories but not utilities, fell to 52.9 in July, from 55.0 in June - its biggest one-month drop since September last year..

(Read more: Expert reactions on the IIP data, click here)

(Additional reporting by Rafael Nam; Editing by Frank Jack Daniel, Jacqueline Wong and Ed Lane)

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Comments (1)
Subrabhama wrote:
Unfortunately, all the economic indices and parameters suggest a decline in growth the coming months. Industrial production has shrunk; exports have declined; and foreign inflows have dried up.Indeed, the global circumstances are not favourable and add to India’s woes. But then, unlike China, India did not create massive infrastructure or follow a policy of self-reliance. For long, rather too long, India has depended on foreign inflows of a volatile and transiet nature (not even the steady and stable FDI)and these flows have turned treacherous.

The management of exchange rate has become very difficult and the RBI’s muscle to intervene is limited. There is a creeping fear that if the RBI attempts too much, it will drain away the foreign exchange reserves. The fiscal deficits make it almost impossibloe for the government to provide any stimulus. The RBI’s monetary tools have lost efficacy.

Under such circumstances, the Finance Minister’s stridency is unrealistic. Rhetoric and harsh words cannot lead to the country to higher growth. He cannot blame the RBI for all the faults.Interest rate reduction is not a magic wand which will promote higher growth. Governmnet has to reduce its fiscal deficits and also invest in infrastructure. What really constrains India’s growth is the lack of infrastructure to support higher rate of growth. If China is able to turn the tide in a short time, this is because of its extra-ordinary reliance on bank credit and investment in infrastrucure. India has stymied its banking system through the so-called reforms and destroyed development banks (IDBI,IFC, ICICI, etc.)which were earlier financing large value projects. Banks are unable to extend large loans and are already burdened with huge non-performing loans.

Foreign critics and reporters harp on their slogan of India failing in its reforms. What are these reforms and how soon they can lift the ecnomy? FDI in retail will take years to promote any network, even assuming that it serves the poor farmers or the SMEs. FDI in banking is a disaster considering the havoc the bankers have played in Europe.Which banker will come and invest in Indian banks and with waht condiltions and expectations? They are themselves waiting to be bailed out by the ECB, IMF, etc. FDI in insurance is to tie the lives of the people, their future,to foreign gamblers – the same companies like the AIG, Prudential, etc. who have been bailed out by their governments. FDI in civil aviatio is tom foolery viewed against the humoungous debt hang of the airline companies and other unfavourable factors. Pray, how can these reforms solve India’s current crisis and how soon? The cry over reform paralysis is laughable, if not pathalogical.

Aug 09, 2012 5:08pm IST  --  Report as abuse
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