New Delhi: India's industrial production expanded just 0.1% in
April as manufacturing slowed and mining shrank, reinforcing fears of a
sustained slowdown and piling up pressure on the central bank to further
ease key policy rates at its review meeting on Monday to stimulate the
economy.
Tell us: How badly has the slowing economy affected you?
The index of industrial production (IIP) had advanced 5.3% in April last year.The output had contracted by 3.5% in March.
The unexpected slowdown in industrial output is the latest in a series of bad news for the economy after the gross domestic product grew at its lowest pace in nine years, at 5.3% in the quarter through March, and inflation jumped to 7.23% in April. Rating agency Standard & Poor's said on Monday that India could become the first of the BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
Growth in manufacturing output, which accounts for about 76% of industrial production, remained almost flat at 0.1% in April, compared with 5.7% a year earlier, showed the data released by the industry ministry on Tuesday. As many as 10 out of 22 industry groups in manufacturing slumped in April.
Mining shrank by 3.1%--its second straight contraction after recording its first growth in February following sixth consecutive slump, as against 1.6% growth a year earlier, the data showed. Power generation gained 4.6% from 6.5% a year before.
Capital goods output, an indicator of investment in the economy, slumped 16.3%, compared with a 6.6% expansion during the review period.
Consumer goods grew faster at 5.2% in April, compared with 3.2% a year before. Similarly, consumer durables output gained 5% against 1.6% in the same month last year.
Citing "upside risk" to inflation, the the Reserve Bank Of India (RBI) in April warned about limited scope for further monetary easing after pruning the main lending rate — the repo rate — after three years by a sharper-than-expected 50 basis points to 8% to boost sagging growth. Headline inflation showed signs of moderation since December before rising in April beyond the comfort level of the RBI and the government.
However, falling global oil prices and declining core inflation as well as growth offered the RBI room to adjust interest rates, RBI deputy governor Subir Gokarn said last week.
COMMENTARY (Agencies)
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, and I would not be surprised if RBI goes for a 50 basis points repo rate cut or a combination of 25 basis points cut in both repo rate and the cash reserve ratio.
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 and other economies are going through; it just added to the negative sentiment. Some degree of caution from the rating agencies is called for.
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
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 could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
- The Reserve Bank of India is widely expected to lower its main lending rate by 25 basis points (bps) to 7.75 percent on June 18 when it reviews its policy for the first time after cutting rates by a sharper-than-expected 50 bps in April.
- Falling global oil prices as well as declining core inflation and growth in India give the central bank room to adjust interest rates, a deputy governor said last week.
- India's economy expanded 5.3 percent in the March quarter, its slowest pace in nine years, on a combination of mounting global uncertainty.
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's sovereign ratings may be jeopardised.
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.
India's president must be chosen by parliament before a July 24 deadline. Although the president does wield some power, the head of state is a largely ceremonial figure. Finance Minister Pranab Mukherjee is a leading candidate for the presidency, opening the possibility of a major cabinet reshuffle in coming weeks that could be the last chance for Singh to bring his floundering government back on track.
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.
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 announced a series of austerity measures in May, including a 10 percent cut in non-plan spending for this fiscal year, but analysts dismissed them as insufficient unlikely have much impact on the country's overall expenditure.
India is sitting on a comfortable cushion of $300 billion in foreign reserves, so comparisons with India's 1991 payments crisis are premature, but confidence is waning.
As ever, India's dependence on imported, subsidised energy is a weakness, with high prices adding to pressure both on the current account and fiscal deficits. A long financial crisis in Europe could exacerbate capital outflows and further trim demand for Indian exports.
What to watch:
- The Reserve Bank of India's mid-quarter policy review on June 18. The central bank has some room to reduce policy rates following moderate core inflation and softer global oil prices, a deputy central banker said in early June.
- Any more moves to roll back - or to press ahead with -subsidy reform, and how the public responds.
Tell us: How badly has the slowing economy affected you?
The index of industrial production (IIP) had advanced 5.3% in April last year.The output had contracted by 3.5% in March.
The unexpected slowdown in industrial output is the latest in a series of bad news for the economy after the gross domestic product grew at its lowest pace in nine years, at 5.3% in the quarter through March, and inflation jumped to 7.23% in April. Rating agency Standard & Poor's said on Monday that India could become the first of the BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
Growth in manufacturing output, which accounts for about 76% of industrial production, remained almost flat at 0.1% in April, compared with 5.7% a year earlier, showed the data released by the industry ministry on Tuesday. As many as 10 out of 22 industry groups in manufacturing slumped in April.
Mining shrank by 3.1%--its second straight contraction after recording its first growth in February following sixth consecutive slump, as against 1.6% growth a year earlier, the data showed. Power generation gained 4.6% from 6.5% a year before.
Capital goods output, an indicator of investment in the economy, slumped 16.3%, compared with a 6.6% expansion during the review period.
Consumer goods grew faster at 5.2% in April, compared with 3.2% a year before. Similarly, consumer durables output gained 5% against 1.6% in the same month last year.
Citing "upside risk" to inflation, the the Reserve Bank Of India (RBI) in April warned about limited scope for further monetary easing after pruning the main lending rate — the repo rate — after three years by a sharper-than-expected 50 basis points to 8% to boost sagging growth. Headline inflation showed signs of moderation since December before rising in April beyond the comfort level of the RBI and the government.
However, falling global oil prices and declining core inflation as well as growth offered the RBI room to adjust interest rates, RBI deputy governor Subir Gokarn said last week.
COMMENTARY (Agencies)
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, and I would not be surprised if RBI goes for a 50 basis points repo rate cut or a combination of 25 basis points cut in both repo rate and the cash reserve ratio.
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 and other economies are going through; it just added to the negative sentiment. Some degree of caution from the rating agencies is called for.
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
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 could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.
- The Reserve Bank of India is widely expected to lower its main lending rate by 25 basis points (bps) to 7.75 percent on June 18 when it reviews its policy for the first time after cutting rates by a sharper-than-expected 50 bps in April.
- Falling global oil prices as well as declining core inflation and growth in India give the central bank room to adjust interest rates, a deputy governor said last week.
- India's economy expanded 5.3 percent in the March quarter, its slowest pace in nine years, on a combination of mounting global uncertainty.
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's sovereign ratings may be jeopardised.
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.
India's president must be chosen by parliament before a July 24 deadline. Although the president does wield some power, the head of state is a largely ceremonial figure. Finance Minister Pranab Mukherjee is a leading candidate for the presidency, opening the possibility of a major cabinet reshuffle in coming weeks that could be the last chance for Singh to bring his floundering government back on track.
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.
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 announced a series of austerity measures in May, including a 10 percent cut in non-plan spending for this fiscal year, but analysts dismissed them as insufficient unlikely have much impact on the country's overall expenditure.
India is sitting on a comfortable cushion of $300 billion in foreign reserves, so comparisons with India's 1991 payments crisis are premature, but confidence is waning.
As ever, India's dependence on imported, subsidised energy is a weakness, with high prices adding to pressure both on the current account and fiscal deficits. A long financial crisis in Europe could exacerbate capital outflows and further trim demand for Indian exports.
What to watch:
- The Reserve Bank of India's mid-quarter policy review on June 18. The central bank has some room to reduce policy rates following moderate core inflation and softer global oil prices, a deputy central banker said in early June.
- Any more moves to roll back - or to press ahead with -subsidy reform, and how the public responds.
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