India’s industrial output unexpectedly shrank in November, and while the data was badly distorted by the Diwali holiday it was still seen backing the case for an interest rate cut to boost an economy that appears set to post its slowest growth in a decade.
The index of industrial production fell 0.1 per cent annually in November, data released by the Central Statistics Office showed on Friday, compared with revised growth of 8.3 per cent in October. Output has grown in just three of the last eight months.
The outturn was even worse than the 0.7 per cent growth a Reuters’ poll of analysts had predicted for November.
Output was depressed by the Diwali holiday, which was in November last year, whereas in 2011 it fell in October. Diwali is one the biggest Hindu festivals in India, with many factories shutting for several days.
‘The correction in the November headline (industrial production) was largely priced in on passage of festive demand and manufacturers’ possibly drawing down on inventories rather than stepping up production towards end-2012,’ said Radhika Rao, economist at Forecast Pte, Singapore.
Still, Friday’s data underscores the challenge prime minister Manmohan Singh faces turning the wheel on the economy.
GDP growth that once looked set to hit double-digits has been stuck below 6 per cent for the past three quarters. The slowdown is worrying for the government as it prepares for a series of state elections and a general election due in 2014.
The government, however, could take some heart from the trade data for December, which showed the pace of contraction was slowing down in the exports sector, which accounts for one-fifth of India’s gross domestic product.
‘All (export) sectors have slightly improved, except textiles,’ trade secretary SR Rao told reporters.
Merchandise exports fell to $24.88 billion in December, down 1.9 per cent from a year earlier. Imports, however, rose 6.3 per cent to $42.5 billion.
The trade deficit narrowed to $17.7 billion in December from $19.3 billion in November. That brought the deficit for the first nine months of the fiscal year to $147.2 billion, widening from $137.3 billion at the same point in the previous year.
India’s current account deficit hit an all time high of 5.4 per cent of gross domestic product in the July-September quarter on a widening trade gap, putting the rupee under pressure.
The rupee was the third worst performer in Asia in 2012, losing 3.5 per cent against the dollar for a second straight yearly loss, even though net portfolio inflows into Indian stocks were the highest in the region.
This reliance on volatile foreign capital inflows to bridge the gap is regarded as a serious fault-line in the economy, haunted by memories of the 1991 balance of payment crisis when the central bank sent 47 tonnes of gold to Europe as collateral for a loan to avert a sovereign default.
Having been pilloried earlier for inaction as economic growth slumped, prime minister Manmohan Singh has launched a slew of bold measures since late last year that included cutting fuel subsidies, hiking rail passenger fares and opening the retail sectors to foreign players.
Still, investments are showing little signs of an upturn. Capital goods production, seen as a guide to investment levels, has grown just once in the last eight months. In November, it shrank an annual 7.7 per cent.
‘The contraction in capital goods after a brief reprieve last month reiterates that investment cycle is yet to pick up in a meaningful manner,’ Shubhada Rao, chief economist at Yes Bank, in Mumbai.