Inflation rate below 5%, raises hope of interest rate cut.
Slowdown signals and the case for cutting interest rates grew stronger today after data released by the government’s statistics office showed that India’s factory output contracted the most in 15 years and headline inflation fell below 5 per cent for the first time in one-year.
The Index of Industrial Production (IIP) went into negative territory for the second time in the current fiscal owing to a combination of a high base effect and lower output by factories. IIP contracted 2 per cent in December, 2008, compared to 8 per cent growth in the year-ago month.
Meanwhile, the Wholesale Price Index (WPI)-based inflation rate fell to 4.39 per cent for the week ended January 31 this year because of a decline in manufactured goods, which constitute nearly two-thirds of the index.
It was 5.07 per cent in the previous week and 4.74 per cent in the corresponding week a year ago. The latest numbers also add weight to arguments by economists who were projecting lower growth rate for the Indian economy against the government’s estimate of 7.1 per cent in current fiscal.
Contraction in industrial output is expected to bring down the overall growth rate as it contributes more than 25 per cent to India’s output.
The price index is expected to drop even further in the next week, given fuel prices were cut in the week ended February 7.
More From This Section
“As far as the interest rates are concerned, the Reserve Bank of India has to take a call. It is desirable to bring down the rates. It is desirable to bring down the reverse repo rate,” said Suresh Tendulkar, chairman of Prime Minister’s Economic Advisory Council.
Repo rate is the rate at which RBI lends to banks and reverse repo is the rate at which the central bank sucks out liquidity from the market.
Demand for monetary actions has risen because there is little room left for fiscal expenditure. First, with elections due in less than three months, any major deficit-financed spending can be announced only in June this year when the new government is sworn in. Secondly, the combined fiscal deficit (both of the Centre and the states) is projected to cross 10 per cent of GDP.
“There is far too much uncertainty in the economy which is having an impact on industrial production. Moreover, it seems that the earlier policy rate cuts by the Reserve Bank of India has not helped the industrial sector,” said Yashika Singh, head economist, analysis group, Dun and Bradsheet.
IIP declined for the first time by 0.34 per cent in October, 2008 but recovered in the subsequent month.
| A SINKING FEELING IIP change in December 2008 | ||||
| Sector | 7-Dec (% growth) | 8-Dec (% growth) | Apr-Dec 07-08 (% growth) | Apr-Dec 08-09 (% growth) |
| Mining | 5.0 | 1.0 | 5.2 | 3.0 |
| Manufacturing | 8.6 | -2.5 | 9.6 | 3.3 |
| Electricity | 3.8 | 1.6 | 6.6 | 2.7 |
| Overall | 8.0 | -2.0 | 9.0 | 3.2 |
| Source: CSO | ||||
Experts say all indicators — industrial output, export growth, slowing tax collections and falling inflation rate — point to economic slowdown, and that RBI has room for another round of rate cuts.
In December, 2008, exports contracted 1.6 per cent and excise collections dipped by 15.5 per cent in the month.
Manufacturing output shrinks: Manufacturing, which has nearly 80 per cent weight in the IIP, contracted 2.5 per cent, the highest ever monthly contraction seen till date.
This was because of a dip in intermediate goods (-8.5 per cent) and consumer durables (-12.8 per cent), the steepest decline in about six years. Intermediate goods are key inputs in the industrial processes and a decline in growth shows waning industrial activity.
Consumer durables production went down as people have postponed plans to buy fridges, television sets and microwaves at a time when the Indian economy is facing headwinds arising out of the global recession. Output of Fast Moving Consumer Goods (FMCG) also contracted 0.1 per cent in the month under consideration.
With several sectors (only seven out of 17 industry groups posted positive growth) in negative territory, Citi India in a research note said it expects RBI to cut rates 100- 150 basis points (one basis point is one-hundredth of a percentage point). “While normal changes in taxation are not announced in an Interim Budget, we could see the poor data being used as a reason for additional spending/tax cuts”, Citi analysts Rohini Malkani and Anuskha Shah wrote today.