A contraction of 5.1 percent in growth of Indian industrial production (IIP) along with a further weakening of the rupee has shocked the markets adequately, with the Sensex down 270 points and Nifty down 84 points by mid day. Even though the market had expected negative IIP numbers, capital goods are trading down 2 percent with L&T, Hindalco, SAIL, BHEL and JSW Steel losing heavily in intra-day trade. All the “expectation” numbers making rounds hovered around a contraction of 2 percent. So 5.1 percent was a shock.
Saday Sinha, deputy VIP Research, Kotak Securities, tells Firstpost, “There is an explanation of a high base last year. The decline of capital goods by 25 percent at 228 is also understandable as last year, the number was at 306. But the capital goods number is the lowest in the last two years.” That is where the problem lies. As Firstpost explained earlier, India is declining on investment and consumption.
Blaming inflation and interest rates for everything that is wrong with the economy will not help. There are other factors involved as well. C Rangarajan, chairman, PMEAC, told CNBC TV18 in an interview, that growth in mining is about (-) 7.2 percent, which means “that some key areas like coal are not doing well. They are not doing well not because interest rates were high, they are not doing well because of other reasons.” Environmental clearance, policy paralysis over land acquisition, railway infrastructure are its main problems, where government initiative and investment are equally crucial.
And it is not just investment numbers that look bad. Auto sales are dismal, mobile subscriber additions are unimpressive. Moreover, the slowdown in investment and consumption will soon spill over to the banking system in the form of bad loans. State Bank of India is already down 2.5 percent today. And reaction from RBI in terms of slashing interest rates should not be expected in a hurry. Kotak’s Sinha says growth rates need to start looking more like 6.5 percent for RBI to react.
Even Ritika Mankar, economist, Ambit Capital is of the view that whilst several emerging markets like Brazil have cut interest rates, interest rates in India are unlikely to be cut at the coming monetary policy review meeting. She tells Firstpost, “These emerging markets are export dependent and a rise in rates typically leads to an appreciation in their currencies on account of fuller capital account convertibility thus hurting growth more profoundly. On the other hand, India’s reliance on exports as a source of growth is limited and India is characterized by limited capital account convertibility.” Moreover, a cut in the CRR now would be an indication of a reversal of the policy rate cycle, something RBI might not want to do as yet.
However, the slowdown in Europe and its impact on India can hardly be overemphasised. Since January 2008, the Sensex and S&P 500 have maintained a positive correlation of around 70 percent. India is a capital deficient country. Given the high cost of debt capital in India, its dependence of on foreign equity capital is meaningful. Consequently, India investment cycle has been suppressed meaningfully by the drying-up of equity capital.
Experts Firstpost spoke to find no reason why industrial production numbers should be better in November and feel it might not improve till investments start picking up. This needs a push from government investment and strong policy decisions. Otherwise, India is in deep trouble.