After the $9-billion goof-up with export data the government once again has egg all over its face with a shocker of a factory output number, which has contracted 5% yoy in October; while the data has been volatile, there?s no doubt that industry is in big trouble. And so is the economy because unfortunately the Reserve Bank of India (RBI) has no room whatsoever to provide some stimulus given that inflation remains close to 9%. While the rise in prices was expected to have moderated to 7% levels by March next year, the persisting pressure on the currency leaves things somewhat uncertain.
The rupee has now traded below 52 to the dollar in most of the last ten sessions and hit a new low of 52.77 on Monday.
While close to $10 billion of foreign institutional flows are expected in the government and corporate bond markets in the course of the next couple of months, flows into the equity markets are down to a trickle.
Meanwhile, exports are tapering off and exporters seem to be holding back in the quest for more profits. So while the RBI may be sympathetic to the cause of boosting the manufacturing sector and making life easier for the corporate sector, it can do very little. Indeed it?s hard to see why the central bank would want to lower the cash reserve ratio (CRR) to deal with the liquidity shortage and might bet on flagging demand for bank credit to take care of it. Although growth is a big worry, the central bank simply can?t afford to take its eyes off inflation just yet.
The numbers may seem a tad exaggerated but there?s no doubt that the trend is weak. The capital goods sector has contracted a sharp 25.5% y-o-y in October and that?s a poor performance even if there?s a base effect or the numbers are lumpy. In fact, the evidence is more compelling with the intermediate goods segment, considering a good lead indicator, which grew at minus 4.7% y-o-y in October and at just 1.3% y-o-y in September.
While the cost of money has been cited as a major reason for companies not moving ahead on new ventures, after so many months of below par performance, it would seem that high interest rates are just a minor factor hurting capital expenditure.
The bigger reason for stalled investments lies in the lack of confidence, which again is the result of unclear policies, delayed clearances and the rather hazy demand outlook. This is especially true for sectors such as mining?which contracted 7% y-o-y in October?where delayed coal allocations are hurting.
With the economy now clearly expected to grow at a much slower pace of just around 7% this year, and little evidence to suggest a reversal in the trend, one can?t blame companies for lying low.
In these uncertain times, it?s hard to visualise how demand will shape up. That?s true for consumer demand as well given that both the durables and non durables de-grew in October; even before this GDP data for the three months to September showed private consumption decelerating at 5.9% yoy and with industry not performing as expected, there?s now an even chance of urban incomes not rising as expected earlier. Hopefully, rural incomes will remain robust.