Industry sluggishness to persist for two quarters
Sep 16 2011 , New Delhi
Tags: News
Outcome of the tug of war between growth and inflation to decide the fate
The compendium of data released in recent weeks has sent shivers down the spine of industrial analysts. With stagnant growth and no recovery in sight, industry leaders are concerned. It seems the sluggishness would persist, at least in the remaining two quarters of 2011-12.
Earlier this week, the Index of Industrial Production (IIP) numbers highlighted the disquieting trend. The figures are abysmally low. Industry grew at 3.3 per cent in July, the slowest in two years, whereas the manufacturing growth was 2.3 per cent. This was in line with the surveys by Ficci and CII released last Sunday.
There are people who would like to adopt wait-and-watch approach. Monthly fluctuations in data, they say, are not a major cause of concern. The problem, however, is that all economic parameters reflect a paralysing picture. Inflation is sky-rocketing. GDP growth estimates have been revised and IIP numbers since April are below expectations.
Inflation for the month of August accelerated to 9.78 per cent on an annual basis. The corresponding figure for the month of August was 9.22 per cent. The Reserve Bank of India (RBI), in a desperate attempt to control the elevated level of inflation, raised the repo rate by 25 basis points to 8.25 per cent on Friday. This, by every reckoning, will accentuate the industry’s problem.
Economic growth estimates have been downgraded for India; most recently by the Asian Development Bank (ADB), which had cut India’s forecast to 7.9 per cent for 2011-12. Earlier this stood at 8.2 per cent. The United Nations Conference on Trade and Development (Unctad) had earlier downgraded the forecast. The European debt crisis is also a cause of concern for the industry. Going ahead, slow growth rates in this region might begin to manifest themselves in industrial growth.
Concerns
These are challenging times for Indian industry. Compared with the corresponding period last year, basic and consumer goods registered a growth rate of 10.1 per cent and 6.2 per cent in the month of July. Intermediate goods decelerated to -1.1 per cent. Consumer durables registered robust growth rates, according to latest IIP data, but given the slow growth in intermediate goods in July, the question regarding the sustained growth of consumer good lingers in uncertainty.
Capital goods were the laggard. Growth for this segment was registered at -15.1 per cent. However, when one looks at the IIP numbers excluding capital goods, the numbers are more encouraging. Ex capital goods, the industrial growth was pegged at 6.8 per cent in July. But one cannot say that a palpable sense of anxiety regarding the future continues to hurt the industry.
“At a time when economic policy should focus on the creation of jobs, it is unfortunate that the economy is being forced into a sluggish growth phase,” said CII president B Muthuraman. Going by past experience it will be difficult for the industry to get out of this policy-induced sluggishness, he said.
Inflation is likely to continue to bite the economy. RBI had raised the rates 12 times in 18 months, but inflation continues to persist unabated. “However, as signs of a moderation in growth are becoming more evident, implying weaker inflation pressures ahead, we believe it will be difficult for RBI to maintain its anti-inflation bias for an extended period. We do not expect RBI to hike rates again in this cycle after September 16,” said Tomo Kinoshita and Aman Mohuanta of Nomura Securities in a report published subsequent to the IIP numbers.
Snuffing out high inflation has proved to be a challenging task. The tug of war between inflation and growth is a long-standing debate.
“The conventional monetary policy tools are not going to work in taming inflation,” said Pinkai Chakraborti of the National Institute of Public Finance and Policy, adding, “The high interest rates are bound to hit infrastructural investment in the country.”
Arpita Mukherjee of the Indian Council for Research on International Economic Relations (Icrier) said the consumer goods segment and automobile sales have been impacted by high interest rates. “Going ahead, the retail industry is likely to come under pressure,” she told FC.
Infrastructural investment is a key component of future industrial growth.
The 12th Plan (2012-2017) projects infrastructural investment at $1 trillion, almost half of which will be invested by the private sector alone. A Ficci-Yes Bank report on infrastructure financing, released on Monday, underscored the deficiencies in the infrastructural sector. “To attract private investments, it is important to ensure that investments in infrastructure yield returns to keep the interest of investors alive,” said secretary general of Ficci Rajiv Kumar.
But with interest rates on the rise which make borrowing more expensive, the perceived risk of investment in this sector by the private sector would be hard to mitigate. “The country is witnessing significant infrastructure gap, particularly in electricity, transport, telecommunication, water and sanitation. Inadequacies in infrastructure are a cause of serious concern for industry at large. Prevailing high interest rate will affect growth as well as curtail infrastructure investment due to high cost of borrowing. Raising money domestically by public sector will be a challenging task due to the high fiscal deficit. The private sector needs to play an important role not only for providing capital but also for management skill and appropriate technology, said Biswa N. Bhattacharyay of the Asian Development Bank Institute.
Regarding the domestic concerns on inflation, hike in the interest rate and low infrastructural investment, political instability, and canker of corruption, the global economic outlook is not helping Indian industry either. The euro debt crisis and a faltering US economy are shrinking the biggest markets for Indian exports. At present, a third of the exports are directed to these countries. Weak global growth will have ramifications here. A further deterioration is bound to have a ripple effect on the industry.
A Ficci survey published in August this year gauged the impact of the European crisis on Indian businesses. The survey noted that in the short run, business prospects for Indian companies will be affected. Anwarul Hoda, the chairperson of Icrier’s trade policy review and WTO research programme, believes that if Europe’s woes continue, and Greece defaults, then a direct implication for Indian trade figures is foreseeable.
The International Monetary Fund’s (IMF) world economic outlook report published in June this year notes that “global activity is projected to slow in the second quarter of 2011 and then reaccelerate in the second half of the year. But activity will remain unbalanced amid elevated downside risks. Growth is set to be sluggish in advanced economies facing fiscal and financial sector balancesheet problems”.
“As per the OECD quarterly report, a sharp deceleration in global merchandise trade in second quarter of 2011 is anticipated. G-7 industrialised nation have also shown a slowdown except Brazil and China. Structural constraints in the US and Europe are broadly projected to keep economy at sub-potential levels of 1 to 2 per cent. Indian exports are now less reliant upon Western demand, having diversified significantly towards other markets. Still, nearly one-third of total exports continue to head towards the US and EU. Moreover, Asian demand – of which China and Asean account for 17 per cent share in India’s exports — is also exhibiting a slowdown,” said the president of the Federation of Indian Export Organisations (Fieo), Ramu S Deora.
The wide arrays of factors, which will hurt industrial sentiments in the coming quarters, are very diverse and far-reaching. The more worrisome factor is that no one quite knows how the deteriorating situation in Europe will unfold. On the domestic front, some daunting policy challenges will continue to be in the limelight; especially the growth Vs inflation debate. Given the multi-faceted concerns, the industry is clearly in a heightened state of anxiety and will continue to be for the coming quarter.
Earlier this week, the Index of Industrial Production (IIP) numbers highlighted the disquieting trend. The figures are abysmally low. Industry grew at 3.3 per cent in July, the slowest in two years, whereas the manufacturing growth was 2.3 per cent. This was in line with the surveys by Ficci and CII released last Sunday.
There are people who would like to adopt wait-and-watch approach. Monthly fluctuations in data, they say, are not a major cause of concern. The problem, however, is that all economic parameters reflect a paralysing picture. Inflation is sky-rocketing. GDP growth estimates have been revised and IIP numbers since April are below expectations.
Inflation for the month of August accelerated to 9.78 per cent on an annual basis. The corresponding figure for the month of August was 9.22 per cent. The Reserve Bank of India (RBI), in a desperate attempt to control the elevated level of inflation, raised the repo rate by 25 basis points to 8.25 per cent on Friday. This, by every reckoning, will accentuate the industry’s problem.
Economic growth estimates have been downgraded for India; most recently by the Asian Development Bank (ADB), which had cut India’s forecast to 7.9 per cent for 2011-12. Earlier this stood at 8.2 per cent. The United Nations Conference on Trade and Development (Unctad) had earlier downgraded the forecast. The European debt crisis is also a cause of concern for the industry. Going ahead, slow growth rates in this region might begin to manifest themselves in industrial growth.
Concerns
These are challenging times for Indian industry. Compared with the corresponding period last year, basic and consumer goods registered a growth rate of 10.1 per cent and 6.2 per cent in the month of July. Intermediate goods decelerated to -1.1 per cent. Consumer durables registered robust growth rates, according to latest IIP data, but given the slow growth in intermediate goods in July, the question regarding the sustained growth of consumer good lingers in uncertainty.
Capital goods were the laggard. Growth for this segment was registered at -15.1 per cent. However, when one looks at the IIP numbers excluding capital goods, the numbers are more encouraging. Ex capital goods, the industrial growth was pegged at 6.8 per cent in July. But one cannot say that a palpable sense of anxiety regarding the future continues to hurt the industry.
“At a time when economic policy should focus on the creation of jobs, it is unfortunate that the economy is being forced into a sluggish growth phase,” said CII president B Muthuraman. Going by past experience it will be difficult for the industry to get out of this policy-induced sluggishness, he said.
Inflation is likely to continue to bite the economy. RBI had raised the rates 12 times in 18 months, but inflation continues to persist unabated. “However, as signs of a moderation in growth are becoming more evident, implying weaker inflation pressures ahead, we believe it will be difficult for RBI to maintain its anti-inflation bias for an extended period. We do not expect RBI to hike rates again in this cycle after September 16,” said Tomo Kinoshita and Aman Mohuanta of Nomura Securities in a report published subsequent to the IIP numbers.
Snuffing out high inflation has proved to be a challenging task. The tug of war between inflation and growth is a long-standing debate.
“The conventional monetary policy tools are not going to work in taming inflation,” said Pinkai Chakraborti of the National Institute of Public Finance and Policy, adding, “The high interest rates are bound to hit infrastructural investment in the country.”
Arpita Mukherjee of the Indian Council for Research on International Economic Relations (Icrier) said the consumer goods segment and automobile sales have been impacted by high interest rates. “Going ahead, the retail industry is likely to come under pressure,” she told FC.
Infrastructural investment is a key component of future industrial growth.
The 12th Plan (2012-2017) projects infrastructural investment at $1 trillion, almost half of which will be invested by the private sector alone. A Ficci-Yes Bank report on infrastructure financing, released on Monday, underscored the deficiencies in the infrastructural sector. “To attract private investments, it is important to ensure that investments in infrastructure yield returns to keep the interest of investors alive,” said secretary general of Ficci Rajiv Kumar.
But with interest rates on the rise which make borrowing more expensive, the perceived risk of investment in this sector by the private sector would be hard to mitigate. “The country is witnessing significant infrastructure gap, particularly in electricity, transport, telecommunication, water and sanitation. Inadequacies in infrastructure are a cause of serious concern for industry at large. Prevailing high interest rate will affect growth as well as curtail infrastructure investment due to high cost of borrowing. Raising money domestically by public sector will be a challenging task due to the high fiscal deficit. The private sector needs to play an important role not only for providing capital but also for management skill and appropriate technology, said Biswa N. Bhattacharyay of the Asian Development Bank Institute.
Regarding the domestic concerns on inflation, hike in the interest rate and low infrastructural investment, political instability, and canker of corruption, the global economic outlook is not helping Indian industry either. The euro debt crisis and a faltering US economy are shrinking the biggest markets for Indian exports. At present, a third of the exports are directed to these countries. Weak global growth will have ramifications here. A further deterioration is bound to have a ripple effect on the industry.
A Ficci survey published in August this year gauged the impact of the European crisis on Indian businesses. The survey noted that in the short run, business prospects for Indian companies will be affected. Anwarul Hoda, the chairperson of Icrier’s trade policy review and WTO research programme, believes that if Europe’s woes continue, and Greece defaults, then a direct implication for Indian trade figures is foreseeable.
The International Monetary Fund’s (IMF) world economic outlook report published in June this year notes that “global activity is projected to slow in the second quarter of 2011 and then reaccelerate in the second half of the year. But activity will remain unbalanced amid elevated downside risks. Growth is set to be sluggish in advanced economies facing fiscal and financial sector balancesheet problems”.
“As per the OECD quarterly report, a sharp deceleration in global merchandise trade in second quarter of 2011 is anticipated. G-7 industrialised nation have also shown a slowdown except Brazil and China. Structural constraints in the US and Europe are broadly projected to keep economy at sub-potential levels of 1 to 2 per cent. Indian exports are now less reliant upon Western demand, having diversified significantly towards other markets. Still, nearly one-third of total exports continue to head towards the US and EU. Moreover, Asian demand – of which China and Asean account for 17 per cent share in India’s exports — is also exhibiting a slowdown,” said the president of the Federation of Indian Export Organisations (Fieo), Ramu S Deora.
The wide arrays of factors, which will hurt industrial sentiments in the coming quarters, are very diverse and far-reaching. The more worrisome factor is that no one quite knows how the deteriorating situation in Europe will unfold. On the domestic front, some daunting policy challenges will continue to be in the limelight; especially the growth Vs inflation debate. Given the multi-faceted concerns, the industry is clearly in a heightened state of anxiety and will continue to be for the coming quarter.
The article was first published in the Financial Chronicle
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