The data gets even more bewildering: loan growth is sluggish at sub 16%, capex is at alltime lows, indirect tax collections subdued, PMI for December was good at 54 but was weak at 51 in November and now factory output growth for November has come in at a strong 5.9% y-o-y. As far as the Reserve Bank of India (RBI)?s policy stance is concerned, however, it will be the inflation number for December that will be key and that?s expected to come in at a just 7.5% on the back of a base effect resulting from a sharp spike in food prices in late 2010. However, it will be surprising if the central bank chooses to ease liquidity by trimming the cash Reserve Ratio (CRR) when it meets to review monetary policy on January 24. It?s true that banks have been borrowing over Rs one lakh crore a day on average from the RBI?s special window but they?re really lending too much?non-food credit is now growing at sub-16%?and the central bank is supporting the bond markets through OMOs to keep a check on yields. More important, inflation may not have been fully tamed; for instance the December HSBC PMI data showed that companies were able to pass on costs to customers indicating that inflationary pressures remain. So while food inflation may have eased non-food manufacturing inflation remains somewhat sticky.
It?s a tough call on for the central bank because the rebound in the IIP notwithstanding, it?s not as though growth is brisk. Indeed, as Rohini Malkani of Citigroup points out, when looked at from a three month moving average basis, the rise in the IIP has slowed to 1.1% from 7.1% in April last year, so the trend remains weak since the growth between April and November, 2011, now stands at 3.8% compared with 8.4% in the corresponding period of the previous year. The jump in November would have also been partly due to the fact that output would have picked up following the festive season in October when there are more holidays. Leif Eskesen, chief economist for India and Asean at HSBC points out that the average growth rate during October-November came in at just 0.6% y-o-y, notably slower than the average growth rate of 3.1% y-o-y seen in the July-September quarter. In other words, growth is clearly slowing, although maybe not as much as was feared when the October data of a negative 5% came in. The biggest concern remains the capital good piece, which contracted once again by 4.6%, albeit way less than the shocking 26.5% in October. Intermediate goods, a good indicator of how things are going, grew by just 0.2% much better than the negative 7.8% clocked in October. CMIE data indicates that there?s no rush on the part of companies to add capacity; new project announcements in the December 2011 quarter fell to their lowest levels since 2005 posting a drop of 41% y-o-y and 17% sequentially. This ties in with loan growth which has been sub -17% in December.
Unless policy issues related to mining are sorted out, it?s hard to see companies mustering up the confidence to invest. That means corporate earnings are going to remain under pressure and one may even see the tempo in toplines coming off in the December quarter earnings.The hard times aren?t over just yet.
