Economy at its worst: IIP data is a wake up call for Chidambaram

Various economic data released on Monday show that the worst fears about economic growth are coming true.

The factory output for June declined 2.2 percent on year while retail inflation rate in July witnessed a marginal fall to 9.64 percent from 9.87 percent a month ago. What is scarier is that the fall in IIP comes on the base of a similar decline a year ago. In other words, the economy is going from bad to worse.

A close look at the IIP data shows that slowdown is getting more broadbased. As many as 16 industries, covering consumer goods to manufacturing sectors, witnessed a decline in output during June. Only 10 industries witnessed a growth.

Among the industries that witnessed a decline, production of motor vehicles, trailers and semi-trailers declined 13.7 in June and 6.7 percent in April-June period.

Production of consumer goods witnessed a 2.3 percent decline with consumer durables seeing a sharper 10.5 percent fall in June. During April-June, consumer durables output dropped 12.6 percent.

Earlier in the day, Siam data showed that domestic sales of utility vehicles (UVs) in July fell for the first time since May 2009, while their exports surged 600 percent.

The fall in domestic sales has been attributed to higher duties on such vehicles and higher diesel prices.

Clearly, the consumer is holding back as economic uncertainty and higher interest rates are hitting her decision making power.

Capital goods output, a barometer of the key infrastructure and manufacturing sector, also witnessed a 6.6 percent decline in June. The cumulative fall during the quarter is 3.3 percent.

Rating agency Crisil estimates that industrial GDP will grow about a mere 0.5 percent during the quarter, that too only if construction maintains its growth rate of past few quarters.

Weak domestic demand, supply-side bottlenecks and policy uncertainty, especially those related to fuel availability, land acquisition and environmental clearances have hurt private sector investments and dampened industrial activity, the research house said.

“Even if one accounts for a normal monsoon and relatively resilient service sector, first quarter GDP growth is almost certain to be below 5.0 percent in 2013-14,” Crisil said in a note yesterday.

But it is doubtful whether the services sector will help much. In July, the HSBC Markit Services Purchasing Managers’ Index witnessed a fall to 47.9 from 51.7 in the previous month. Any reading above 50 is considered a growth and anything below 50 is a contraction.

Reuters reported that the fall-off in activity in the services sector was the first in nearly two years.

Crisil has warned that the data is a wake-up call for the government. A recovery is possible only by speeding up clearances of stalled projects and resolving issues plaguing the mining sector.

There has been movement on this front. The Prime Minister had set up a Project Monitoring Group (PMG) in the Cabinet Secretariat to study and remove the bottlenecks for stalled projects worth about Rs 7-lakh crore.

The PMG in June cleared 11 power projects. After that nothing much has happened.

Unless the government devises ways to change this scenario, long-term foreign capital will not find India attractive and we will remain completely dependent on fly-by-night capital flows to finance the CAD. And in that case, with the US revival on the cards, there is more trouble in store for us.