Had crude oil prices not been where they are, at close to $125 per barrel, and threatening to rise further, the Reserve Bank of India (RBI) would have considered doing more to revive the economy when it meets to review monetary policy in mid-March. But although investments have been near stagnant?gross capital formation contracted 1.2% in the three months to December, 2011 to R4.32 lakh crore?the central bank will find it tough to do more than just to make sure banks have enough liquidity. More importantly, it will also want some commitment from the government on fiscal consolidation and will watch for how the government plans to achieve its fiscal deficit targets for 2012-13. It was expected before oil prices spiked that the RBI might give us a hint, on March 15, about how soon it would cut policy rates. Now, that too might not happen.
While monetary tightening may have the manufacturing space and while falling interest rates will no doubt, boost sentiment, it?s not just the high cost of money that has kept companies from adding capacity. The bigger problem has been the lack of clarity on policies and disruptions in the supply of key resources?mining contracted 3.1% y-o-y. It?s the lack of supply-side reforms and the indiscriminate spending by the government that has left inflation sticky and above the RBI?s comfort levels.
So unless the government speeds up clearances, industry, which grew at just 0.8% y-o-y versus 2.8% y-o-y in the September quarter, will remain at a near standstill. What?s held up the GDP, which grew at 6.1% y-o-y in the December, 2011 quarter, is the still galloping services piece, which clocked a shade under 9%. But even that pace was lower than the 9.3% seen in the September quarter.
So what will be the trend going ahead. Farm sector output, up 2.7% y-o-y, had been a tad disappointing and it looks like we would need to live with sub-7% GDP growth for a couple of quarters before the base effect bails it out.
While the PMI data for January was encouraging, news from the core sector, which barely grew at 0.5% last month, was a lot more sobering. It?s tempting to think that growth may be bottoming out; after all capital formation had contracted even more sharply in the September quarter.
But evidence on the ground isn?t convincing; for instance, loan growth, now running at sub-16% levels, isn?t picking up. Also, no matter how strong domestic consumption?private consumption gathered momentum at 6.2% y-o-y?versus 2.9% in the September quarter?the global slowdown and all its attendant problems can?t be wished away.
As Leif Eskesen, chief economist for India and ASEAN, HSBC, points out the slowdown has been broad based and net exports pulled down growth substantially.
The unleashing of large amounts of liquidity into the European financial system?now at $one trillion through the LTRO of the ECB?might boost the stock markets and help corporates and the government pick up some money. In India?s case, the capital inflows also help cushion any fall in the currency. But, on the flip side, the money could find its way into commodities like oil, which hurt India badly, as is happening now. Seems like there could be another couple of quarters to go before we?re out of the woods.