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Coping With A Slowing Economy

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For the rest of the world, it may look like the wait for the economic recovery just got longer as India's industrial production shrank for a second straight month in December, weighed down by weak investment and consumer demand. But Prime Minister's Economic Advisory Council Chairman C Rangarajan is unfazed. He is confident that the economy will bounce back and grow between 6-7 per cent in the next financial year.

"I believe that in the next fiscal we should be able to grow at 6-7 per cent and 8 per cent thereafter," said Rangarajan said at a book release function.

Casting doubt on Finance Minister P. Chidambaram's view that Asia's-third largest economy is showing signs of recovery, the index of industrial production (IIP) fell 0.6 per cent annually in December, data released by the Central Statistics Office showed on Tuesday, 12 February, 2013, dragged down by a dominating manufacturing sector and problems in the mining sector. This was the sixth monthly decline in the nine months so far this financial year.

To top it, India's annual consumer price inflation accelerated to 10.79 per cent in January from the previous month. India's retail inflation is the highest among the BRICS group of emerging economies - Brazil, Russia, China, and South Africa. Food prices for consumers rose 13.36 per cent in January from 13.04 per cent in December.

It was just last week that the FinMin had robustly defended the country's expected growth rate when it opposed the data released by the Central Statistical Organisation (CSO) (showing a patry 5 per cent growth) and pegged expected economic growth rate at 5.5 per cent or more in the current financial year.

FinMin said on Friday, 8 February, 2013, the CSO has underestimated GDP growth rate for current financial year and was confident that economic expansion will exceed 5.5 per cent. "It is likely that the advance estimates of 5 per cent will be revised and the final estimate will be closer to the government's estimate of a growth rate of 5.5 per cent or slightly more," the Finance Ministry said.

The Central Statistical Organisation (CSO) has "probably underestimated" the growth for the current fiscal and estimates are likely to be revised upwards in the final projections, the ministry said in a statement.

In advance estimates for 2012-13, the CSO has projected economic growth rate of 5 per cent, the lowest in the decade. The finance ministry said CSO's advanced estimates have often been revised either upwards or downwards because it takes into account the data till November or December

Read Also: December IIP Contracts 0.6%
Read Also: 5 Or 5.5%? Growth Debate On

Manufacturing output, which accounts for the bulk of industrial production and contributes about 15 per cent to overall gross domestic product (GDP), fell 0.7 per cent in December from a year earlier.

"What is clear is that any meaningful industrial recovery is eluding us. Demand destruction is far more well entrenched than we thought," said Sujan Hajra, chief economist at brokerage firm Anand Rathi in Mumbai, who said he now sees GDP growth next year of 5-6 per cent.

Chidambaram is under political pressure to unveil a growth-oriented budget on February 28 for the next fiscal year, as the government of Prime Minister Manmohan Singh gears up for an election due by early 2014 at the latest.

But he is also faced with the arduous task of trimming a swollen fiscal deficit that has put India's investment-grade credit rating in peril. He has already ordered spending cuts in welfare, defence and road projects for this financial year.

Critics warn that at a time of low growth, lower spending risks deepening the slowdown without helping the deficit-to-GDP ratio.

The government will not go in for additional borrowing this fiscal year and will be able to keep the fiscal deficit at 5.3 per cent of GDP, said Arvind Mayaram, a senior finance ministry official.

Finance Minister P. Chidambaram has staked his reputation on lowering the deficit to 5.3 per cent of GDP to improve the investment climate following ratings agency threats to downgrade India's sovereign debt to junk if action was not taken.

The bottom line appears to be that while much needed structural reforms are taking place, they won't cause a substantial improvement in growth and inflation immediately. "Policy room, therefore, will remain constrained", according to Deutsche Bank analysts.

How To Revive The Economy?
Rangarajan has emphasised the need to kick-start investments to get back to the high growth trajectory.

"Our investment rate has fallen but it is still growing at a rate of 30 to 32 per cent ... We need to look at the fact that we have not been getting the full benefits of the investments that we have put in. If we activate these investments, we can get a higher growth," Rangarajan said.

The government is committed to treading the path of fiscal consolidation, Rangarajan said, adding "fiscal deficit in current year will be close to targeted 5.3 per cent".

The government has revised upwards the fiscal deficit target for 2012-13 to 5.3 per cent of the GDP from the 5.1 per cent earlier because of increasing expenditure and lower-than-estimated revenue realisation.

Tech Exports To The Rescue 
Export growth from India's IT outsourcing sector is set to accelerate in the fiscal year starting in April, an industry lobby group said on Tuesday, 12 February, 2013, as hopes rise that an improving global economy will drive demand. he sector's exports are expected to grow between 12 and 14 per cent in 2013-14 to as much as $87 billion, according to the National Association of Software and Services Companies (Nasscom).

Exports were estimated to have grown 10.2 per cent to $75.8 billion in 2012/13, Nasscom said, slightly lower than expected as corporations in its biggest markets, the United States and Europe, cut back on IT spending due to global uncertainty.

Rate Cuts May Help
The Reserve Bank of India reduced its policy interest rates by a widely expected 25 basis points on January 29 to spur the economy, and investors hope slower price rises will lead to another.

"Despite incremental efforts we are still staring at a weak growth print," said Jyotinder Kaur, economist at HDFC Bank. We expect a rate cut in March as growth is consistently surprising on the downside while the pace of CPI (consumer price inflation) has stabilised."

Consumer price inflation inched up to 10.79 per cent in January from 10.56 per cent a month ago, according to other data on Tuesday.

January wholesale price index data, which the Reserve Bank of India gives more weight to in setting policy, is due on Friday, 15 February. The index for December rose 7.18 per cent, the slowest in three years.

Amar Ambani, Head of Research, India Infoline Limited said:  “CPI continues to be stubborn with January data coming at 10.79 per cent, higher than preceding month's 10.56 percent. The persistent uptick in retail inflation may constrain the central bank from cutting policy rate further in the March policy,” s

Siddhartha Sanyal, India economist, Barclays Capital, said: "...going ahead downside risks to growth exist due to the government cut in spending and this is pertinent more to the services sector where government spending has a big role. I think for RBI, WPI (wholesale price index) number and the trade numbers will be more crucial to decide on future rate cuts."

Rupa Rege Nitsure, Chief Economist, Bank of Baroda said: "IIP growth has been in negative zone in December on the back of continued weaknesses in investment and consumption demand as is reflected in the strongly negative growth in capital and consumer durable goods.

"Today's reading is supportive of the CSO estimate of 5% GDP growth for FY13. Addressing risks to growth will be the main priority for the RBI and the government in the coming months."

Niyesh Ranja, Economict, Bank of India also agreed with Nitsure."The decline in IIP in the month of December, however, suggests that the CSO estimate on full-year growth may be right. This is a kind of pointer which shows that the investment slowdown is quite acute and we need to review various stalled projects.

"From the policy perspective, the RBI cut rates in January and the banking system has started responding to that cut. So we need to wait and watch how the pass-though happens going ahead as well. I think the RBI may not choose to cut rates in March and wait for the full-year policy in the next fiscal year to take a view on further cuts."