It never rains, it pours. So if it wasn?t bad enough that the rupee?s dropping off to levels of 47, factory output for July has come in at an anaemic 3.3% yoy, with the capital goods segment contracting 15.2%.
In fact, the intermediate goods category, believed to be a good lead indicator, de-grew 1.1% so that the manufacturing space managed an increase of just 2.3% yoy.
However, the 8.8% yoy increase in the Index of Industrial Production (IIP) in June, when capital goods turned in a 37.8% plus growth, was always a bit of a question mark; electrical machinery had jumped an unbelievable 89% in that month whereas the average for the previous 12 was just 2%. Adjusting for that, IIP in June would have come in at a far more sedate 4.8% and the 3.3% for July may not have brought the markets crashing down. Nevertheless, it?s clear now that no company wants to set up new capacity; the trend in the three month moving average for capital goods is now at sub 10% compared with 17% in June.
However, that?s unlikely to deter the Reserve Bank of India (RBI) from increasing policy rates when it meets later in the week.
The Brazilian central bank cut interest rates by 50 basis points in late August despite inflation running above target. But India?s central bank has vowed to fight inflation, which is nudging double digits and expected to hit 9.6% for August compared with 9.2% in July. So there?s little chance the RBI will not tighten rates.
While the data may be somewhat uneven, growth is clearly moderating, though it may not yet significantly below trend; GDP for the three months to June came in at 7.7% and since the monsoon has been on track, one can?t really see a collapse just yet.
At the same time, industry needs a big nudge otherwise it won?t be long before growth does slip further especially since there hasn?t been too much headway on the policy and reform front.
While two of the bills passed in the monsoon session of the Lok Sabha were important, especially the Land Acquisition Bill, the sooner there?s clarity on legislation for mines and minerals and companies, the better. Of course, it?s not reform that?s pulling down confidence levels of Indian industry; it?s more the weak global economy together with the sovereign debt concerns in the Eurozone that?s holding back investments. After all, exports account for about a fifth our GDP and global growth is now expected to come in at sub-4% this year. While there?s pretty much consensus that China will escape a hard landing some of the data is disconcerting.
For instance, China?s trade surplus narrowed in August as imports jumped sharply and typically that should be interpreted to mean that demand remains robust.
However, when adjusted for seasonalities, the numbers show a drop in exports in August which warrants some caution.
Nowhere is the fear more visible than in the equity markets; over the past week or so global emerging markets funds have seen about $one billion move out taking the amount pulled out so far this year to over $20 billion. It?s hard to believe that we saw as much as $84 billion coming into these funds last year on the back of $65 billion in 2009.
