Economic data for the first quarter of 2013-14 does not bode well for GDP growth. Data from vehicle sales to bank credit growth to tax collection to IIP growth show that the economy would see growth for fiscal 2013-14 coming in lower than the decade low growth of 5% seen in fiscal 2012-13. The RBI will have to respond to the growth slowdown with monetary easing as unless interest rates come off in the economy, consumer and investment demand will not pick up leading to further loss of consumer and business confidence.
The Central Bank is unlikely to lower its key policy rate the repo rate in its 30th July 2013 policy review. The record low levels of the Indian Rupee (INR) that touched Rs 61.21 against the USD in intraday trading on the 8th of July 2013 has the RBI worried on capital outflows and inflation. India’s foreign exchange reserves have fallen to a three and half year lows to USD 280 billion as of 5th July 2013 on the back of the INR weakness. CPI (Consumer Price Inflation) trended higher in June to levels of 9.87% from 9.31% levels seen in May on the back of higher food prices. WPI (Wholesale Price Inflation) is expected to trend higher in June to over 5% levels against levels of 4.7% seen in May.
Monsoon has fully set in the country leading to food supply constraints. Normal monsoons help improve agricultural production and this will bring down food prices going forward.
Vehicle sales have fallen in the first quarter of fiscal 2012-13 with total sales down by 2.1%. Passenger vehicles and commercial vehicles sales have declined by 7.2% and 8.1% respectively. Credit growth has come off to 13.7% levels on a year on year basis against levels of 15% seen in March 2013. Corporate tax has grown by 7.8% while gross direct tax collections have grown by 11.5% against budget estimates of 17.5% for the full fiscal year.
IIP (Index of Industrial Production) growth was negative 1.6% for May 2013 while manufacturing growth was a negative 2%. Consumer durables have seen negative growth of 10.4% in May.
Demand is definitely coming off in the economy at the consumer level and given that investment demand is almost absent due to issue of consumer demand, global economic weakness, high interest rates and other structural issues a weak demand led growth slowdown is high on the cards.
Exports have fallen in the first three months of fiscal 2013-14 despite a weak INR that is down by over 11% in the same period. Falling exports indicate weak global economic conditions.
RBI will have to address growth concerns in the economy, as one of the reasons for a weak INR is weak economic growth. Markets will start expecting rate cuts post July 30th policy review.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.