India macro economic outlook is not looking very positive and all indications are that GDP growth for 2011-12 will come in below RBI’s projections of 7.6%. India recorded a growth rate of 8.6% in 2010-11 and a drop of over 1% in GDP growth is a worry, especially when government finances are weak and the RBI is in no position to help the government. The hope going forward is that inflation will keep its head down as growth slows down and RBI can ease policy rates in the face of slowing growth and falling inflation expectations.
IIP (Index of Industrial Production) growth for the month of September 2011 came in at 1.9%, down 1.3% month on month and the slowest growth seen in the last couple of years. Manufacturing growth dropped by 1.1% month on month. The IIP growth for April-September 2011-12 was at 5% against a growth rate of 7.8% seen in the previous year. IIP is seen a poor index given issues on the volatile capital goods index, which swings between positive and negative growth. Capital goods index fell by 6.8% in September 2011 against a growth of 4.1% seen in August 2011. However, the broad trend of a slowdown in IIP growth is visible and is corroborated by other indicators including tax collections, export slowdown and weak vehicle sales.
October 2011 tax collections saw a slowdown with indirect tax collection up by 8% year on year against an April-October 2011 growth rate of 17.8%. The gross direct tax collection for the April-October 2011 period was 48.5% of the total budgeted amount and the net tax collection growth was 7.1% for the period. The hole in government finances is felt in the overdraft the government is running with the RBI. The government overdraft with the RBI is over Rs 50,000 crores as of 4th November 2011, way higher than the Rs 20,000 crores overdraft limit set by the RBI.
Exports for October 2011 fell by 18% on a month on month basis. Exports peaked out at USD 29.3 billion in July 2011 after which it is consistently down. October exports is the weakest this fiscal. Prolonged slowdown in the global economy could bring down export growth further.
Total domestic vehicle sales dropped by a percent in October 2011 on a year on year basis with the passenger car segment seeing a 20% fall in growth. Two wheelers and Commercial Vehicles grew by 2% and 18% respectively in October 2011. Two wheeler growth rates have come off from 24% growth levels seen in September 2011. High interest rates and high inflation is affecting vehicle sales.
India inflation as measured by the WPI or Wholesale Price Inflation for the month of October 2011 came in at 9.73% as against a level of 9.72% seen in September 2011. The rise in inflation by 0.64% month on month is accounted for by a rise in primary article inflation over the month of September to October. Primary article (weight of 20% in the WPI) inflation went up from 10.8% to 11.4% over the period.
Central banks in emerging economies that were focused on bringing down inflation expectations are either easing monetary policy or keeping policy neutral in the wake of threats to global growth due to the debt crisis in Europe. Brazil kicked off the process of cutting rates with rate cuts in August 2011. Indonesia cut rates in October and November 2011. Singapore indicated it would intervene to keep down its currency to favor exports. South Korea held rates and has indicated no further rate actions until mid 2012.
China’s inflation for October 2011 came in at 5.5% against over 6% levels seen in the last couple of months. China has been maintaining a tight monetary policy in the face of rising inflation expectations and can now turn policy neutral on signs of inflation coming off.
The ECB (European Central Bank) cut rates by 25bps in November 2011 citing growing worries of recession in the Eurozone due to the debt crisis. Europe’s third largest economy, Italy is imposing austerity measures to bring down its debt, which at 120% of GDP is seen as unsustainable. Austerity measures across economies in Europe will bring down growth and a fall in growth could lead Europe into a mild recession in 2012.
US economy continued to add jobs but not at the pace required to bring down unemployment. US added 80,000 jobs in October and unemployment came off to 9% from 9.1% seen in September. The US Federal Reserve (Fed) has indicated that it will look to use more tools at its disposal to hasten the process of job growth.