The domestic economy is showing signs of moderation in growth. Key indicators including industrial production and credit growth are growing at a slower pace than the pace at which they were growing last year. Index of Industrial Production (IIP) has shown a growth of 6.8% for the April-June 2011 period against 9.6% growth seen in the April-June 2010 period. IIP growth for June 2011 came in better than expected at 8.8% against consensus estimates of 5.7%. Manufacturing index recorded a good growth of 10% in June against a growth of 6.1% in May. The IIP growth numbers were clouded by the volatile capital goods index, which showed a 37.7% growth against a growth of 6.1% seen in May. Many economists are writing off the IIP as a good growth indicator given unreliability of data. Credit growth numbers have come off with bank credit growing by 18.5% year on year as of July 2011. Credit growth was trending at over 23% in the beginning of the year. RBI has scaled down credit growth target to 18% from 19% projected in May 2011. High inflation and high interest rates are showing its effect on the economy.
Inflation is looking to trend down from levels of 9.4% seen in June. July inflation is expected to come in at 9.2% on the back of a fall in global commodity prices. Inflation is likely to remain sticky at 9% levels for a couple of months on the back of rise in food prices due to the monsoons. However, inflationary pressures are looking to come off with domestic economy showing signs of cooling off while the global economy is looking weak on the back of debt issues.
Trade data continues to show good growth with exports rising by 37% year on year in the April-July period. The rise in exports is not reflecting a potential slowdown in the global economy and it remains to be seen if the trend will continue. The vehicle sales data for July showed mixed trends with domestic car sales falling by 16% year on year while commercial vehicle sales grew by 23.7%. Higher commercial vehicle sales indicate good economic activity.
Tax collections showed good growth with gross direct tax collection for the April-July 2011 period registering a 26.5% growth. Indirect tax collections showed a 27% growth in the April-June 2011 period against a 15% growth seen last year.
The Indian economy is showing strength in some areas while interest rates and inflation are hitting it in other areas. If inflation comes off and RBI can turn neutral on policy, sectors hit by rates and inflation will do better.
The US and the Eurozone are facing headwinds due to sovereign debt issues while emerging economies including China, Brazil and Korea are facing headwinds due to inflation and exports.
The US government is committed to spending cuts of over USD 2 trillion over a period of time. The spending cut is aimed at reducing its fiscal deficit, which is expected to end calendar 2011 at 74% of GDP. S&P the rating agency cut US credit rating from AAA to AA+ with a negative outlook as it deemed that spending cuts of USD 2 trillion was not enough for the US to hold on to its AAA rating. The spending cuts coupled with the rating downgrade have prompted economists to revise US GDP growth for 2011 downwards by 25bps to 50bps. The US Federal Reserve has pledged to hold on to policy rates at 0% to 0.25% for the next two years in the face of the economic downturn. US data itself came in better than expectations with job additions for July at 118,000 against consensus of 75,000 job additions. US unemployment rate too came off to 9.1% from 9.2% in June. Retail sales for July increased by 0.5% in the US belying fears of consumer spending cuts on the back of high unemployment levels.
The Eurozone is facing growth issues on austerity measures to bring down debt levels. France the second largest Eurozone economy did not grow at all in the second quarter of 2011. Greece GDP fell 6.9% in the second quarter on a year on year basis due to its austerity measures. Italy is unveiling austerity measures to bring down it deficit. Germany is the only economy in the Eurozone that is doing well with unemployment at twenty year lows. However, manufacturing and exports showed a weaker trend in July. The manufacturing index dropped to a 21 month low in July while exports fell 1.2% month on month in June. Germany is Europe’s largest economy and a weak growth trend in Germany does not bode well for Eurozone growth.
China’s inflation for July came in at 6.4%, a multi year high, placing pressure on the government to rein in growth. Korea’s inflation for July at 4.7% was at a four month high and is placing pressure on the central bank to raise rates. Brazil’s inflation rate at 6.8% for July is at multi year highs and is forcing policy makers to act to curb inflationary pressures. Domestic inflationary pressures coupled with weak growth in the US and Eurozone could hit these economies hard.