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BW Businessworld

The Good, Bad & The Ugly

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After the good news on the infrastructure front in November and fall in food inflation to six-year low in December, it was the manufacturing sector's turn to brighten up the country's economic outlook on Monday.  India's manufacturing activity surged to a six-month high in December thanks to a spike in factory output and new orders from domestic and international firms, a survey of purchasing managers showed on Monday. But the party was spoilt by poor performance in the export front. 

India's exports recorded their slowest pace of growth in two years at 3.8 per cent in November after being hit by the global slowdown and moderation in demand in developed markets. Imports on the other hand grew at a faster rate of 24.5 per cent year-on-year to $35.9 billion in
November, translating into a trade deficit of $13.6 billion, according to Commerce Ministry data released on Monday.

The HSBC Markit India Manufacturing PMI jumped to 54.2 from 51.0 in November, its biggest monthly rise since April 2009.

The index has stayed above the 50 mark that separates growth from contraction for 33 months now. The PMI came closest to suggesting a contraction in September when it dipped to 50.4.

The brighter industrial outlook followed the bounce-back in infrastructure growth in November (6.8 per cent), after touching a five-year low of 0.3 per cent in October.

In October, India's industrial output slumped more than 5 per cent from a year earlier, far worse than expected and the first drop in more than two years, with capital goods output down 25.5 per cent.

Overall economic growth had slowed to 6.9 per cent in the September quarter, its weakest in two years, and some economists expect India to struggle to reach 7 percent growth in the fiscal year that ends in March 2012. The government had been targeting 9 per cent earlier this year.
Riding on a stellar growth in cement, electricity and refinery products in November 2011, the eight infrastructure sectors which have weightage of 38 per cent in the overall Index of Industrial Production (IIP), considerably improved year-on-year as well from 3.7 per cent in November 2010.

However, due to lagging performance in the previous months, the April-November growth of the core industries stood at 4.6 per cent as against 5.6 per cent in the same period last fiscal,  according to the data released on Monday.

Export Growth Slowest In 2 Yrs
India's exports recorded their slowest pace of growth in two years at 3.8 per cent in November after being hit by the global slowdown and accompanying moderation in demand in developed markets,

In November, 2010, the country's overseas shipments amounted to $21.48 billion.

"The November export growth is two-year low. If it will decline at this pace, the exports growth may enter a negative zone," export body Fieo Director General Ajay Sahai said.

The growth rate is the lowest since October, 2009, when it contracted by 6.6 per cent.

In sharp contrast, imports grew at a faster rate of 24.5 per cent year-on-year to $35.9 billion in November, translating into a trade deficit of $13.6 billion.

From a peak of 82 per cent in July, export growth slipped to 44.25 per cent in August, 36.36 per cent in September and 10.8 per cent in October.

In November, oil imports grew by 32.28 per cent to $10.3 billion, while non-oil imports rose by 21.69 per cent to $25.6 billion vis-a-vis the year-ago period.

In the eight-month April-November period, exports aggregated to $192.69 billion, a year-on-year growth of 24.55 per cent, thanks to the surge witnessed in the early months of the fiscal.

Experts opined that the country's exports growth during the entire fiscal would stand at about 20 per cent.

"Though demand condition is not good in the US and Europe, other markets in the Asean region and Latin America are doing good," Indian Institute of Foreign Trade Director K T Chacko said.

Expanding Manufacturing
Manufacturing in Asia's third largest economy is expanding, just as factory activity in developed economies across the world is contracting. Data released in China on Friday, shows the sector likely shrank in December, after remaining mostly below 50 since July.

"Activity in the manufacturing sector rebounded in December led by higher demand from both domestic and foreign clients, suggesting that the momentum in the sector is not quite as weak as official and more dated IP (industrial production) data would suggest," said Leif Eskesen, economist at HSBC.

The new orders index, a reliable gauge of future output, jumped to 57.9 from 52.8 in November, its biggest jump in two years, suggesting the factory sector might be in for better days ahead.

New orders from overseas clients also grew at a faster pace than last month, the second consecutive expansion after shrinking for four months straight.

The Indian economy is facing strong headwinds this year as the euro zone crisis drags on and Reuters polls suggest the central bank will ease monetary policy by June to counter this, despite stubbornly high inflation.

While central banks globally, including those in China and Brazil, have eased monetary policy to moderate the impact of the euro zone's sovereign debt crisis, the Reserve Bank of India has chosen to pause its hiking cycle rather than ease, as reining in inflation remains a priority.

India's headline inflation has stayed above 9 per cent for 12 consecutive months despite 13 rate increases by the RBI since March 2010 that has lifted the benchmark lending rate to 8.5 per cent from 4.75 per cent.

"The solid demand from clients allowed manufacturing companies to increase output prices at an accelerated pace to pass on rising costs. While the sequential inflation of input costs decelerated slightly, it remained high by historical standards," said Eskesen.

PMI data showed input prices grew at a slightly slower pace than last month while the output cost index rose for the second month running.
The latest PMI survey also showed that employment grew for the second time in fourteen months. 

India Defies Weak Asia Output
Asian factory output remained weak in December, with Chinese manufacturers narrowly avoiding contraction and South Korea's industrial production shrinking the most in almost three years, while Europe data this week is expected to point to a recession.

India, however, saw strong factory activity in December that defied recent weakness in Asia's third-largest economy.



Meanwhile, housing and jobs data from the United States last week showed the world's largest economy gaining momentum heading into the New Year.

Export-reliant Taiwan saw its manufacturing sector contract for the seventh straight month, according to the HSBC Taiwan Purchasing Managers' Index for December, but the rate of decline slowed.

"Although production and new business inflows are still declining, the pace of deterioration eased across the board for the second straight month," HSBC economist Donna Kwok said of the Taiwan data on Monday.

"Half a year of inventory de-stocking means that a small boost for production could be around the corner soon," she said.

Worries have grown that China, the world's second-largest economy, is headed for sharply slower growth, undermining its ability to offset looming recession in debt-laden Europe and an uncertain US recovery.

China's official purchasing managers' index, released Sunday, edged up to 50.3 in December from 49 in November.

Similar data released on Friday -- the HSBC Purchasing Manager's Index, designed to preview the state of Chinese industry before official output data are published -- showed manufacturing inched up to 48.7 in December from a 32-month low of 47.7 in November, but fell short of the flash reading of 49.

This added to expectations that Beijing will take policy measures to support growth.

China is widely expected to announce a cut in the required ratio of reserves it demands commercial banks hold, after cutting it by 50 basis points on November 30 from a record high of 21.5 per cent.

That was the first cut in RRR for commercial lenders in three years, a policy shift after a vigorous tightening campaign to curb inflation which hit a three-year high of 6.5 per cent in July.

Reversal Of Money Tightening
India, with its soaring inflation and dramatic slowdown in growth in recent months, may see an end to the central bank's long-running policy tightening.

The country's manufacturing activity surged to a six-month high in December, helped by a spike in factory output and new orders.

The HSBC Markit India Manufacturing PMI jumped to 54.2 from 51.0 in November, its biggest monthly rise since April 2009. The index has stayed in growth territory for 33 months now. The PMI came closest to suggesting a contraction in September when it dipped to 50.4.

Official data released last month showed industrial output in India plunged 5.1 percent in the year to October, its steepest fall since March 2009, raising fears the economy might be heading for a hard landing.

The Indian economy is facing strong headwinds this year as the euro zone crisis drags on and Reuters polls suggest the central bank will ease monetary policy by June to counter this, despite stubbornly high inflation.

"From here on, we could expect reversal of monetary tightening. But it's difficult to say when that will take place and in what shape it will roll out," Reserve Bank of India Governor Duvvuri Subbarao told the BBC, reiterating the view spelled out by the RBI at its policy review last month.

Era Of Low GrowthIn Indonesia, inflation in December eased to a 21-month low of 3.79 per cent, giving the central bank more room to cut interest rates again if needed next week to shield Southeast Asia's biggest economy from the global slowdown.

Still, Indonesia's central bank is expected to hold rates steady at its January 12 meeting despite the lower-than-expected figure.

The picture was far gloomier in South Korea, where cooling global demand squeezed manufacturing and kept the HSBC/Markit PMI survey showing contraction for a fifth straight month in December.

"The waves (of economic difficulty) will likely be much higher this year. The global economy is not in a temporary slump but has entered a new era of low growth," President Lee Myung-bak said, adding the government would bring down inflation close to 3 percent. It averaged 4 percent in 2011.

Singapore is also expected to report on Tuesday that GDP shrank in the fourth quarter from the third.

Manufacturing data from Europe this week is also expected to be weak, with a Reuters poll last month forecasting euro zone composite PMI at 47.9 for December, an improvement from the 47 in November but still below the 50 mark that separates growth from contraction.

(with Agencies)