Is the Indian economy slowing down? If you go by the IIP (Index of Industrial Production) growth numbers, the credit growth numbers and order book growth for infrastructure project the economy is showing signs of slowing down. However, export growth, commercial vehicle sales growth and tax collection growth do not point to a slowdown. The future course of the economy will depend on how soon inflation comes off and how soon the RBI can turn neutral on monetary policy.
The IIP growth numbers for May 2011 came in weaker than expected. The IIP growth for May came in at 5.6% against consensus estimates of over 8%. The IIP contracted by 3.1% month on month. This is the second straight month of month on month contraction in IIP. The IIP had contracted by 1.6% month on month in April. Bank credit growth at 19.9% year on year in June 2011 has slowed down from over 23% year on year growth seen six months ago. High interest rates and high inflation is impacting demand for loans. Investment demand too is showing signs of slowdown with order inflows for infrastructure projects stagnating at around Rs 47,000 crores over the last one year (source: Business standard) Infrastructure projects are hit by multiple factors, from land acquisition to inflation. Industry sound bytes too are not promising.
Exports have shown good performance for June 2011. Exports have grown by 46.4% year on year for June 2011. Exports at USD 29.2 billion has grown by over 12% month on month. Export growth is promising despite signs of a weakening global economy. Commercial vehicle sales, seen as a barometer of economic growth, registered a 17.7% growth for June 2011. Growing commercial vehicle sales in a period of high inflation and high interest rates is promising. Direct tax collections were higher by close to 24% year on year in the first quarter of 2011-12. The higher direct tax collection is an indication that corporate profitability is still not threatened.
Inflation as measured by the WPI (Wholesale Price Index) came in at 9.44% for the month of June 2011. Inflation printed at 9.06% for the month of May and 9.74% (revised from 8.66%) for the month of April. Inflation is close to its peaks, and unless there is a surge in food and commodity prices, inflation will not trend much higher from current levels.
On the whole, the Indian economy while showing signs of weakening is looking resilient despite global economic issues. Peaking out of inflation and interest rates (RBI has raised the benchmark policy rate the repo rate by 275bps cumulatively over the last fifteen month to bring down inflation expectations) is positive for the economy.
On the global front, US unemployment was at calendar year highs of 9.2% for June while the economy added 18,000 jobs (weak number as consensus was an addition of 109,000 jobs). The economy is growing but growing at a sluggish pace, which is not enough to bring down the unemployment rates. China’s GDP growth came in at 9.5% for the second quarter of 2011 and the growth was led by rise in investment spending. China raised interest rates for the third time this year as inflation for June printed at 6.4% against a 5.5% rise in May. China is focusing on inflation control and there are worries of a slowdown in the Chinese economy on the back of rate hikes and inflation. The 9.5% GDP for the second quarter has belied some of China hard landing worries.
The Eurozone is fighting a debt default crisis that can be contagious. Greece is on the verge of default while countries from Ireland to Italy are facing the repercussions. Bond yields of the stressed countries have shot by 100bps to 400bps over the last one month. Despite sovereign debt issues, the ECB hiked policy rates by 25bps as a sign of it’s anti inflation stance. Inflation is trending at over the ECB target levels of 2%. Eurozone growth could drop sharply on the back of austerity measures of the member countries.