FE Editorial : Not yet bottomed out

Written by The Financial Express | Updated: Feb 5 2013, 08:46am hrs
With bank credit to the commercial sector growing at just 7% between April and January, and that too on a low base of 9% reported in the corresponding period of 2011-12, its evident corporate India is not in the mood to invest. In fact, any banker would tell you that even the little thats being lent is mostly for working capital or for projects that were firmed up before 2012. Whether its due to a lack of confidence or clearances, companies arent really looking to expand their operations just yet. Some of this is reflected in order books at capital goods firms; while BHELs order backlog shrank 7% sequentially in the three months to December and 22% yoy, order flows at Siemens fell 31% yoy in the same period. In fact, the poor offtake of trucksvolumes of M&HCVs at Tata Motors fell a steep 12% sequentially in Januarysuggests a lull in manufacturing, a sure sign of a stagnating economy. RBI estimates capacity utilisation in the economy at 73-74% and thats not hard to believe because corporate Indias financial results for the December quarter reveal that companies have little pricing power and arent able to push through volumes either. The short point is that top line is hard to come by whether for a Hindustan Unilever, a Bajaj Auto or an UltraTech Cementnet sales grew just 12.6% yoy for a sample of 749 companies, the slowest in several quarters.

Clearly, consumer confidence will be restored once the capex cycle turns, helping create more jobs and driving up incomes. But that seems some time away; CMIE data shows that new project starts in the three months to December 2012 continued to be weak, falling 8% qoq and 74% yoy. That doesnt suggest a rash of projects any time soon, which means the countrys industrial output might remain anaemic for longer than anticipated; economists have been suggesting that industrial output, which rose 1.3% between April and October and contracted 0.1% yoy in November, might be bottoming out. This, despite the capital goods indexdata for which is considered somewhat unreliablecontracting 7.7% yoy in November, taking the three-month moving average to a negative 4.4%. However, if demand isnt picking up, theres little reason for companies to add to capacity. Sales of both commercial and passenger vehicles have been unexpectedly subdued in January and channel checks by analysts reveal that the sales may be the result of companies merely stocking up. There was some hint of a slowdown in January in the manufacturing PMI, which had stabilised between September and December, but dropped in January to a three-month low of 53.2 with both domestic and export orders falling. Since many of the major issues plaguing the economy are yet to be resolvedthe ban on mining in Karnataka and Goa, for instanceit would seem premature right now to say industrial growth has troughed out.