India's factories lose festival
lift By Kunal Kumar Kundu
NEW DELHI - India's industrial production
growth rate for November 2012 plunged, the
euphoria of a major uptick in October giving way
to a more sobering reality.
As represented
by the Index of Industrial Production (IIP),
growth contracted by 0.12% year-on-year as against
Reuters expectation of a 0.7% year-on-year
expansion and compared with 8.34% growth in
October '12 (revised upward from the first
estimate of a growth of 8.21% year-on-year).
Industrial production had grown 6.01% year-on-year
during November 2011.
As was suspected,
India's IIP for last October was a mere flash in
the pan as it benefited from low base effect
related to the festival period. More importantly,
it masked the anaemic growth in the
previous months. During five
out of the seven months between March and
September 2012, the index actually contracted - a
clear indication of the manufacturers reacting to
falling demand by curtailing production and using
up the inventory. This is reflected in the GDP
data.
An important component in the demand
side GDP data (as is reflected in GDP at market
price) is change in inventory. In the case of
inventory accumulation, this component rises,
while in the case of inventory drawdown this
component decreases. For two consecutive quarters,
inventory levels have been falling, and the
inventory as of the third quarter 2012 is lower by
40.5 billion rupees (US$740 million) compared with
the first quarter of 2012. With October being the
festival period in India, it is not a surprise
that the manufacturers were on production
overdrive to build up inventories in anticipation
of meeting festival-induced demand.
However, consumers did not loosen their
purse strings to the extent anticipated (being
clearly done in by high inflation and high
interest rates). During November, sales of
passenger car contracted by 8.25% compared with
November 2011, while total passenger vehicle sales
grew less than 4% during November.
More
importantly, reflecting the overall economic
slowdown, sales of medium and heavy commercial
vehicles declined by more than 33% during
November. With external demand also faltering what
with exports in dollar terms contracting during
eight out of last nine months (March '12 -
November '12) despite a weak domestic currency,
India's manufacturing caved in again.
Manufacturing (which has a weight of 75.5% in the
IIP) grew at a mere 0.28% annual rate compared
with growth of 6.59% recorded during November 2011
and 9.83% in October 2012.
On the positive
side though, the three-month moving average data
for November registered an annual growth of 2.41%,
which is more than double the 1.07% growth
recorded in the same month a year previously.
What is a major cause for concern is the
continuous slowdown of the capital goods sector.
In November, it contracted by 7.7%. Overall,
during six out of the seven months of the current
fiscal year (to March), this sector recorded
negative growth. As a result, for the period
April-November 2012 it contracted by a remarkable
11.1%, compared with a contraction of only 1% for
the same period in the previous financial year.
The sharp slowdown is a manifestation of a
large number of projects (both green and brown
field) being currently on hold because of policy
paralysis and various obstacles such as
environmental and land issues. Delay in land
acquisition has resulted in substantial time
over-run for the Navi Mumbai airport project.
Corruption perception and other hurdles (including
land acquisition) have led to both time and cost
over-runs of the Asian Genco projects. Gas-based
power plants in Gujarat are stuck because of
dispute between National Thermal Power Corporation
and Reliance Industries Ltd. The list is endless.
Despite this, the only reason credit
growth is holding up is because of rising working
capital requirement of the various corporate
houses, especially the oil marketing companies,
which are bleeding due to a rising subsidy burden
while the government has so far refused to pay its
own share of oil subsidy.
With
investment-related corporate borrowing down to a
trickle and tight-fisted domestic consumers
reducing their demand for consumer durables,
houses and so forth, the banks are now forced to
tread the risky path of increasing unsecured loans
(personal loans, credit card loans etc - which
have a higher probability of default) to their
overall loan portfolio for sake of growth of
business.
Hence, in November 2012,
personal loans grew 19.1% on an annual basis as
against 13.4% growth during the same month a year
previously. Even credit card loans jumped by 25.7%
as compared to only 3.7% a year ago. On the other
hand, growth in consumer durable loans contracted
7.8% compared with the same period in the previous
year.
What the November IIP number also
reveals is that small and medium-sized enterprises
(SMEs) are facing a difficult operating
environment, when one compares and contrasts the
Purchasing Managers' Index (PMI) survey data and
the IIP data. It is important to note here that
while the PMI survey relates to the bigger
manufacturing units, IIP data covers both big and
small units.
While the November PMI data
showed a major uptick (seasonally adjusted
manufacturing PMI rose from 52.87 to 53.70, output
PMI rose even faster to 55.40 from 52.69) the
contraction in November IIP data brings forth the
difficulties faced by SMEs. This is not a surprise
though. While high inflation and falling demand
erodes their margin, higher risk perception means
they are operating under a much higher interest
rate environment.
Given this and the fact
that inflation is unlikely to ease off
substantially as the government is committed to
raise administered prices of oil and oil products,
raising prices of electricity etc, the Reserve
Bank of India will likely shift focus from
inflation to growth (which continues to remain
weak), and it is quite likely that the central
bank might make the first easing move during the
monetary policy meeting on January 29.
Kunal Kumar Kundu a New
Delhi-based economist.
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