So far, the perception has been that growth has bottomed out and things will start looking a lot better in the second half of the fiscal. The latest index of industrial production (IIP) print for July (0.1 per cent) somewhat challenges that theory. Trend suggests that the weakness may continue in the coming months, too, as industrial production has been declining on a month-on-month basis for four out of the last five months and for nine months over the last one year. This implies a sustained weakness in industrial production. Though the index may show single digit growth in the coming months, that would be merely statistical in nature due to last year’s low base.
Industrial growth this year has been coming down on a month-on-month basis. In July, while the electricity generation sector declined 1.1 per cent month-on-month, the manufacturing sector’s growth was up 1.7 per cent month-on-month. Emkay Global’s Dhananjay Sinha believes that the manufacturing sector will not see a turnaround soon as credit flow to the sector will also slow down as banks will start deleveraging soon to bring down their credit-deposit ratio.
A sustained slowdown in industrial production in the second quarter of FY13 will have implications for gross domestic product (GDP) growth as well. Mole Hau of BNP Paribas says: “India’s quarterly GDP data are estimated using the monthly index of industrial production and industrial value-added is worth a combined 19 per cent of Indian GDP.” Morgan Stanley’s Upasana Chachra and Chetan Ahya expect FY13 growth to touch a 10-year low of 5.1 per cent on poor agriculture output, sluggish growth outlook in the developed markets and weakness in the services sector. In the event of continued inaction from the government, they see the risk of “deeper macro stress” increasing. That could entail further significant deceleration in GDP growth to 4.3 per cent in FY13, says Morgan Stanley.
While economists are unanimous on their prognosis on GDP and industrial growth, they are divided on how the central bank will respond to the situation. Indranil Sen Gupta, India economist at Bank of America-Merrill Lynch is expecting a 25 basis points cut in CRR on September 17 as growth is likely to slow below the Reserve Bank of India’s 6.5 per cent forecast. Morgan Stanley believes that the challenging inflation outlook coupled with persistent high fiscal deficit will not provide comfort to RBI to reduce policy rates in the next monetary policy review. Siddhartha Sanyal of Barclays maintains that the rest of FY13 will see another 100 basis points repo rate cuts.