Factory output, trade data point to continued weakness

Jan 11 2014, 17:54 IST
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Industrial production fell 1.6% in October Industrial production fell 1.6% in October
SummaryIndia’s industrial production fell by an annual 2.1% in November 2013

The Cabinet Committee on Investments boasts that it has removed the roadblocks for Rs 3.6 lakh crore worth projects since last January and large chunks of this money have already been spent, but even the latest industrial production/trade data barely corroborate that optimism. Reflecting continued weakness in demand, India’s industrial production fell by an annual 2.1% in November 2013 despite a relatively favourable base, owing primarily to a big slump in manufacturing, which accounts for three-fourths of the relevant index.

The much-lower-than-expected headline Index of Industrial Production (IIP) figure, put out on Friday, was complemented by merchandise trade data that revealed imports continued to drop at a brisk pace — by 15.2% in December to $36.5 billion. Industrial production fell 1.6% in October — in fact, it reported negative growth in four out of the eights months from April to November this fiscal.

The manufacturing sector, hit by a tapering of the export demand besides torpid domestic consumption and input constraints, contracted by 3.5% in November. Imports fell even more steeply (22.9%) in the case of non-oil items in December, and the decline was manifest in the imports of industrial inputs and capital goods as well.

The continued moderation in trade deficit so far this fiscal, however, augurs well for the country’s current account deficit, which, helped by the curbs on gold imports besides the overall import slowdown, shrank to 1.2% of GDP in July-September quarter. The trade deficit widened marginally to $10.14 billion in December compared with $9.22 billion in November.

The coal allocation scam, the restrictive “go, no-go” policy by the environment ministry and the Supreme Court crackdown on illegal iron ore mining have taken a heavy toll on Indian mining. Despite some efforts like fuel supply agreements (FSAs) to boost Coal India’s production and the fillip being given to captive coal policy, the mining sector has remained in a shambles for three years in a row. As per the IIP data, in 25 out of 32 months since the start of FY12 to November 2013, year-on-year contraction was reported in mining output.

“Industrial growth is likely to remain weak for the rest of 2013-14 due to infrastructure and input constraints, and weak domestic demand,” a Crisil report said. “Even though the mining ban has been lifted in Karnataka, revival in mining output will be slow as it will take time for firms to obtain relevant clearances and ramp up production. The Cabinet Committee on Investments has also been fast-tracking stalled projects; however, as most of these are infrastructure projects and have long gestation periods, the impact of these measures will not be felt until 2014-15,” it added.

Commerce secretary SR Rao mainly blamed “an unplanned maintenance shutdown at Reliance Industries” for the 16% drop in petroleum exports – a major contributor to overall exports – last month, hinting at better times ahead. The trade deficit has also narrowed so far this fiscal at $110.04 billion, compared with $146.82 billion in the year ago period. But a 22.6% plunge in non-oil imports – the fourth straight monthly fall above 20% – and a 15.3% drop in overall inbound shipments in December point at a pronounced slowdown in industrial demand, caused by factors other than a weak rupee and a crackdown on gold purchases from overseas.

Since the government is planning major cutbacks in spending to meet the fiscal deficit target, the scope of stimulating growth through public investments seems squeezed. This means unless private investments are front-loaded, optimism about an economic recovery is far-fetched. However, with the focus on inflation control by the RBI and now the government, analysts don’t see any loosening of the benchmark lending rate by the central bank soon to encourage investments. Consumer inflation last month surged to 11.2%, led by a 14.72% rise in food and beverage prices. Analysts expect the the wholesale and consumer prices data to be released next week to show some moderation since vegetable prices have eased.

“The problem is that the demand situation remains abysmally weak. An 8.7% drop in consumer goods output, mainly the 21.5% contraction in consumer durables, even in the supposedly peak festival season month, suggest that people are just not spending. So we don’t see any economic revival at this stage,” said CARE Ratings chief economist Madan Sabnavis.

During April-December, exports stood at $230.3 billion and imports at $340.3 billion, while the trade deficit was about $110 billion. Merchandise trade deficit widened slightly in December 2013 to $10.1 billion from $ 9.2 billion in November. Overall, trade deficit for Q3 of FY14 at $ 29.9 billion is at the same level as in Q2 FY14. Given this, and with service export growth in Q3 expected to be at least similar to that in the second quarter (in line with global recovery), India’s current account deficit is expected to remain close to the level seen in Q2 FY14 (1.2% of GDP),” Crisil said.

The IIP data showed growth in capital goods output — a gauge for fixed corporate investment — remained tepid at 0.3% despite a favourable base of -8.5% a year before. The sector has witnessed contraction in 14 of the 20 months through November. Even the modest uptick in the second quarter in gross fixed capital formation, which rose 2.6% in the second quarter from a year earlier and gained 5% compared with the June quarter, seemed coming largely from pipeline investments and not fresh ones.

The manufacturing sector contracted by 3.5% in November, compared with -0.8% a year before. Mining inched up by 1% in November, thanks to a favourable base of -5.5% a year earlier, while the electricity segment grew 6.3%, against 2.4% during the same month last year.

Mining has remained in the negative zone for the most part since the 2011-12 fiscal, thanks to ban on illegal mines and uncertainties about coal block allocation following the Supreme Court verdict.

CII director-general Chandrajit Banerjee said the government has to ensure that projects getting cleared by the CCI are implemented on the ground. “At the same time, steps such as encouraging competition in the mining sector and taking steps to start all legal mining in the ban-affected states, speedy implementation of DMIC, fast-tracking NMP, among others would bring industry back to the path of growth. CII maintains that government policies should be complemented by the shift towards an accommodative policy announcement by the RBI in its forthcoming monetary policy to revive investment and propel demand, especially in consumer durables which are deep in the red,” Banerjee said.

Ficci president Sidharth Birla said: “Manufacturing growth is significantly affected by low growth in mining since sectors like metals that depend on minerals and have substantive weight in the index have pulled down the growth. Capital goods remain a cause for concern as growth of this sector was a meagre 0.3% over a negative base of 8.5% in November 2012.”

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