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Economy Oct 12, 2012

IIP improves, but dark clouds loom

By Sourav Majumdar

The latest Index of Industrial Production (IIP) figure, which showed factory output growing 2.7 percent in August, will doubtless bring some cheer back to policymakers and the economy in general. Latest figures show IIP rose a higher-than-expected 2.7 percent, while revised figures showed it actually contracted by 0.2 percent in July. Manufacturing rose 2.9 percent year-on-year.

These figures, however, come amidst mixed signals from both the domestic and the global economy. While the IMF has painted a gloomy scenario on the global front and even slashed India's growth estimates to 4.9 percent for the 2012 calendar year, the bad news came in on the trade deficit front. The trade deficit has come in at a hefty $18.1 billion, the widest in 11 months and exports have fallen sharply, dipping 10.8 percent from a year ago, in September. This has put economists and policymakers in a tizzy, with exporters clamoring about the high cost of credit and steep transaction costs.

While the current account deficit (CAD) for the first quarter of FY13 has fallen to 3.9 percent, the latest trade deficit and export figures will come as a huge worry.

The latest IIP print, however, shows some signs that the manufacturing sector may be limping back on track, with the Reserve Bank of India also loosening purse strings by way of easing of cash reserve ratio (CRR), which puts more money with banks for productive lending. While critics will still view the latest data with skepticism given the government's propensity to goof up on figures, the broad point is that these figures, together with the wave of reform measures unleashed by the government of late, will tend to bring some relief to both the corporate sector and policymakers alike.

Industrialists like Venugopal Dhoot are already bullish and told CNBC-TV18 that there was a likelihood things would improve from here on. Most industrialists and chambers of commerce have lauded the government's recent measures despite the problems it has brought on the UPA politically.

However, several areas of concern remain. While the current account deficit (CAD) for the first quarter of FY13 has fallen to 3.9 percent, the latest trade deficit and export figures will come as a huge worry. While some economists say the latest export figure could be the result of a technical error and may get rectified soon, the fact remains that the trade deficit is a worry and will have implications for CAD, something which government officials are acutely aware of.

The volatility of the rupee has come as big blow for exporters too, with a report in The Economic Times on 12 October quoting SP Agarwal, the president of the Delhi Exporters Association as saying the government should protect exporters from wild currency fluctuations.

Eye on prices

The export slump apart, one area which continues to be disappointing is the inflation front. The September retail inflation number came in at 9.73 percent, which will continue to weigh on the RBI's mind when it takes stock of monetary policy on 30 October. The key figure to watch will be the headline inflation number due next week. That could be a decider about which way the RBI would move on rates, going forward. The August headline inflation number was 7.55 percent, much higher than RBI's comfort level of 5 percent.

While there is mounting pressure on the central bank to reduce rates - and the export slump would increase that - the inflation number together with the expectation of higher commodity prices in the coming days thanks to the latest round of quantitative easing (QE3) in the US, would be factors which would play an important part in shaping the next round of monetary policy.

Given the current economic realities, those betting on a rate cut on 30 October could well be in for another disappointment. Chances are the central bank may just continue with its policy of holding on to the key rates while trying to make more money available to the system. Think CRR, not repo.

by Sourav Majumdar

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