If there was any doubt that the green shoots theory being talked about by some sections was off the mark, the May Index of Industrial Production (IIP) print for May 2013, which came in at a shocking -1.6 percent, made it clear that the government’s efforts at bringing the economy back on the growth path just aren't working.
The Reserve Bank of India (RBI), which has tried to aid the government’s efforts earlier this year by cutting its benchmark repo rate thrice, has other problems to worry about – sticky inflation, an uncomfortable current account deficit (CAD) and a falling rupee being the chief concerns – and hence the dismal IIP number will clearly not do much for those clamouring for a rate cut when RBI meets again on 30 July to review its monetary policy for the year.
To be sure, the slowdown in industrial production is pretty much across the board. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for May 2013 stand at 122.6, 175.4 and 172.4 respectively, reflecting corresponding growth rates of (-) 5.7 percent, (-) 2.0 percent and 6.2 percent as compared to May 2012, government data shows. The seriousness of the problem is evident with the sharp decline in mining and the de-growth in manufacturing which had seen 2.8 percent growth in April. Manufacturing constitutes over three-fourths of industrial production. The bottomline: things are getting worse, despite the government’s pronouncements and RBI’s earlier efforts to push growth with an accommodative monetary policy.
If one takes the May IIP figure together with the latest figures on car sales and the Purchasing Managers Index (PMI) print which is hovering just around the 50 mark (a figure of over 50 signifies expansion), the picture is even more dismal. While CNBC-TV18 reported that a May 2012 revision in the gas output figure had impacted the May core sector numbers as well, and the same revision could have impacted the IIP figures too, the actual figure is bound to impact sentiment further and increase the corporate sector’s demand for RBI to cut rates again on 30 July.
However, the IIP figure will not be the key number which the central bank will be watching, ahead of its next policy review. Just a day before the IIP and consumer price index (CPI) numbers were released – with CPI coming in at a very uncomfortable 9.87 percent – RBI governor Duvvuri Subbarao had once again made it clear at a speech in Indore that controlling high inflation would remain a high priority with the central bank, though growth and the external situation would also figure in its list of factors. The CPI figure will therefore be a worry for RBI, though the central bank chiefly takes the wholesale price index (WPI) number into account, and that has eased of late, easing to under 5 percent.
However, with retail inflation once again moving upwards, and global factors still keeping the rupee on tenterhooks, chances that RBI will effect another rate cut on 30 July seem rather remote. The rupee has been the focus of regulatory and government action of late, but the causes for its fierce decline are largely global. With the Federal Reserve sending mixed signals relating to the phasing out of its Quantitative Easing programme, there’s very little clarity now on which way the global economic environment will finally tilt. This will keep RBI’s focus sharply on the rupee and its impact.
The only relatively positive piece of news which came in on data-heavy 12 July was the contraction of the trade deficit, and a marginal decline in imports, thanks to the curbs on import of gold and silver. But this is unlikely to be a great morale-booster for a central bank battling heavy odds in its bid to maintain monetary stability in a globally uncertain environment with the government still unable to push through key structural reforms.
With finance minister Palaniappan Chidambaram seeking to make a strong case for India to US investors in such an environment, it would seem the government’s priorities would be a trifle misplaced. What urgently needs attention are the twin deficits and the structural bottlenecks which impede investment activity. It is amply clear now that RBI can attempt to push growth with rate cuts only up to a point. Beyond that, the answers must lie with the government.
In a pre-election year, policy efforts will likely be skewed towards politics rather than economics. That would be another major worry for the RBI which has for long been looking at structural reforms from the government. Subbarao retires in September. But the task for the RBI and its next boss will get more challenging in the coming months.