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Bad Luck And Troubled Time For India

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It was a mixed day for India on the economic front on Friday, 12 July as the government came out with trade, production and inflation data. While there was a flicker of hope with trade deficit narrowing in June from a 7-month high the previous month, data showed that industrial production in May contracted by 1.6 per cent, the lowest in the past 11 months, on account of poor show of the manufacturing and mining sectors. To add to the woes, India's annual consumer price inflation picked up in June to 9.87 per cent, after slowing for three straight months. Food prices rose an annual 11.84 per cent in June, faster than 10.65 per cent in May.

During April-May the factory output measured in terms of IIP worked out to be meagre 0.1 per cent, down from 0.6 per cent in the corresponding period last fiscal.

The Industrial of Index Production (IIP) was 1.9 per cent in April and 2.5 per cent in May last year, as per the data released by Central Statistical Organisation. April's output growth was revised down to an annual 1.9 per cent from 2.3 per cent earlier.

Read Also: Consumer Price Inflation Touches 9.87% In June

Read Also: May Industrial Production Unexpectedly Falls To 1.6%
 
The unexpected dip in industrial production can be laid at the doors of manufacturing and mining sectors. Manufacturing sector, which constitutes over 75 per cent of the index, contracted by 2 per cent in May as against a growth of 2.6 per cent in the year-ago month. The mining sector output too declined by 5.7 per cent in May, compared to a dip in the production by 0.7 per cent in the year-ago period.

The only ray of hope in the dismal scenario seemed to be the trade data, as a lower deficit should ease pressure on India's bloated current account gap, the broadest measure of international trade, and the beleaguered rupee currency. But the narrowing of trade deficit was helped to a large extent by a slowdown in gold imports. But here again, the relief may not last long as low prices and the coming wedding season are expected to bolster demand for the yellow metal.

The deficit narrowed to $12.24 billion from $20.14 billion in May as the growth in gold and silver imports slowed to 22.8 per cent year-on-year at $2.45 billion in June.

"With gold imports looking soft, and the non-oil, non-gold trade deficit remaining low, trade deficits are likely to be range-bound in coming months," Barclays Capital wrote in a note after Friday's government data.

A persistent shortfall in the trade account has pushed up India's current account deficit to 4.8 percent of GDP, almost twice the perceived comfort level.

The gap has not only increased India's reliance on overseas funding, but has also hit the rupee the hardest in the ongoing global sell-off in emerging currencies.

The rupee has lost over 8 per cent against the dollar so far this year and is the worst performing emerging Asian currency so far this year. It hit an all-time low of 61.21 per dollar last week.

However, the sharp depreciation in the rupee has not helped Indian merchandise exports, which fell 4.57 per cent from a year earlier to $23.79 billion, their second straight monthly fall.

Gold Prices To Rise
Low prices and coupled with the approach of the wedding and festival season are also expected to help a steady rise in gold imports in coming months.

Gold prices in India are down 14 per cent from the high seen in late November 2011.

"Sustainability is still the pertinent question," said Radhika Rao, an economist at DBS in Singapore, referring to the moderation in gold imports.

Gold forms an essential part of a bride's dowry in India and is also considered auspicious as a gift or offering at religious festivals. Rural areas make up about 60 percent of demand in the country.

The government raised the import duty on gold to 8 per cent and tightened restrictions on its supplies, alarmed by an annual 109 per cent surge in gold and silver imports in April and May combined.

India needs about $85 billion in new foreign investments this fiscal year to fund the current account deficit that is expected to improve to around 4 percent this fiscal year, still way above the country's comfort level of 2.5-3 percent.

Analysts say financing the deficit in a risk-averse global economy will be a challenge, which could add to the pressure on the rupee. A relentless depreciation in the currency is undermining the steps taken by New Delhi since late last year to revive the economy as it threatens to revive inflation and increase subsidy bill by pushing up the prices of imported goods.