Coming on the back of a drop in the manufacturing PMI from the 10-month high of 52.5 in February to 51.3 last month and a second straight month of decline in the services PMI, Fridays raft of data punctured the optimism of many that the Indian economys engine might have begun chugging along after a long, discomfiting lull.
The post-election government at the Centre will likely inherit an economy that hasnt yet bottomed out, although things might look up before long. Rating agency Fitch, which on Friday affirmed Indias sovereign rating at BBB- with a stable outlook, said it expected the countrys economic growth to accelerate from 4.7% in FY14 to 5.5% this fiscal and 6% next year. It banked on a gradual pick-up in investment once the election uncertainty dissipated, thanks mainly to the clearances of close to 300 investment projects by the Cabinet Committee on Investment. However, some of these projects may no longer be viable or may still face difficulties at the state level, Fitch said, something that the new government to be sworn in by end-May will have to tackle with urgency.
Earlier this week, the International Monetary Fund had forecast Indias GDP growth to accelerate from 4.6% in FY14 to 5.4% in FY15 and further to 6.4% in FY16.
Helped by the decline in imports driven by low demand and a 40% fall in gold and silver imports (a five-year low), merchandise trade deficit narrowed 27.2% in FY14 to $138.6 billion, a three-year low.
In the fourth quarter of FY14, the trade deficit stood at $28.6 billion against $29.9 billion in Q3. These augured well for the current account, most said, although some analysts, pointing to a widening of the trade deficit in March to $10.5 billion from $8.1 billion in the previous month, said authorities might need to be cautious about withdrawing gold import curbs.
Crisil Research said: The reduction in trade deficit in Q4 suggests further improvement in the (current account deficit) in the fourth quarter. If services exports, remittances and investment income remain broadly unchanged in Q4, CAD for fiscal 2014 could fall below 2% of GDP for the first time since fiscal 2008-09.
March trade deficit has re-widened on the back of a jump in the oil import bill, which is likely a reflection of the hardening in global commodity prices. What's worrying here is that despite the gradual increase in the retail fuel prices, demand has not tapered off effectively, said Radhika Rao, economist at DBS Bank in Singapore.
Exports for all of FY14 stood at $312 billion against the targeted $325 billion but higher than $300 billion in FY13, a growth of 4%.
Importantly, given the prolonged slump in domestic demand, exports of goods and services as a share of GDP was projected to rise from 22% in FY11 and 24% in FY13 to 24.9% in FY14, as per advance GDP estimate released a few weeks ago. Imports, however, were projected to account for 28.8% of GDP in FY14, down from 30.7% in the previous year.
Exporters were worried that the rupee's recent gains would erode their competitiveness in export markets. The domestic currency has appreciated 12.5% against the dollar since its lowest in August last year to 60.18 on Friday. While some analysts said the rupee could rise to 57 over the next three months, Engineering Exports Promotion Council's Anupam Shah said: Unless the RBI keeps our currency from appreciating, we will be in serious trouble facing huge competition from China, Turkey, Indonesia, Brazil and other emerging markets.
As for industrial output, electricity generation grew at its fastest since September last year at 11.5% in February and mining posted a 1.4% expansion. These were, however, not enough to offset a 3.7% contraction in manufacturing, stoked by a demand collapse as the industrial production slumped from 0.8% growth in January. In six of the 11 months to February, industrial production witnessed contraction.
There was also further proof of the investment climate deteriorating, with capital goods output a proxy for the fixed corporate investment witnessing a sharp 17.4% contraction in February, compared with 9.1% growth a year before, despite an excise duty cut on capital goods announced in the interim budget for 2014-15. Although notorious for volatile movement, the capital goods segment has seen contraction in 17 of the 23 months through February, reflecting persistent weakness.
Consumer goods output, too, declined 4.5% from a year before, the fifth straight monthly drop, with consumer durables declining at an even faster pace of 9.3% in February from the same period last fiscal.
Seeking a favourable interest rate regime, CII director general Chandrajit Banerjee said the negative growth of manufacturing for the fifth consecutive month showed weak consumption and investment demand are continuing to stymie growth impulses. Such a steep fall in manufacturing disproves that growth has bottomed out. Both consumer demand and investment conditions seem to be weakening thereby further dampening the outlook for manufacturing, said Arbind Prasad, director general of Ficci.
Major export sectors like gems and jewellery, tea, coffee and textiles have not done well and others like pharmaceuticals and petroleum have shown modest growth. Exports to Latin America, GCC and even north Africa are down, said Ajay Sahai, director general and CEO, Federation of Indian Export Organisations.