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Dismal Signs

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The silver lining is just a sliver on the cloud of inflation: the number for the month of July 2011 came down a tad, from 9.44 per cent in May to 9.22 per cent in June. But the cloud also got bigger: the inflation number for May was revised upwards, from 9.06 to 9.56 per cent.

But manufacturing inflation — the bigger worry for government just now — remained sticky at 7.7 per cent compared to 7.3 per cent in June. Basic metals and chemicals' prices continued to rise further, increasing input costs for manufacturers and reinforcing expectations that inflation is going to stay ‘elevated' (in the parlance of economists) for the rest of the year.

True, global developments — the potential recession in the developed economies in the US and Europe, for one thing — are casting a pall on the prospects for the Indian economy. Analysts are comparing the gloomy news to the circumstances in 2008, when the US sub-prime mortgage market crisis came to a head. At that time too, most people in this country felt we were reasonably insulated from the global crisis. At is turned out, we were not, and we aren't this time either.

Then, with low interest rates and inflation, a significant loosening of monetary policy helped mitigate the effects; this time, we don't have that. Credit is nowhere nearly as affordable as it was then. Our fiscal affairs are a bit of a mess: the deficit is upwards of 8 per cent of GDP, and the debt-to-GDP ratio is 67 per cent.

The US and Europe account for more than a third of our exports, and a recession there is going to hurt. From the numbers — both from the GDP data of the last quarter of 2010-11 (FY11) and subsequent monthly updates — our exports have performed robustly. But a report from Jeffries, the investment bank, makes a few disquieting observations. A review of port traffic data relative to exports shows that growth is flat. Comparing the import data of the countries that account for the bulk of our merchandise exports to our export data, wide differences emerge, says Jeffries, even after accounting for data lags.

Quarterly corporate results for June from the software services firms suggest strength, but the guidance for coming quarters does not inspire great confidence. Most of them expect some sort of moderation. But then, we are largely a domestically driven economy, it is argued, 90 per cent of it in fact, and that could still keep the economy chugging along.

Really? A recent analysis by Mumbai-based brokerage firm Prabhudas Liladhar suggests that capital investment — what drives future economic performance — has been falling. New investments in power, for instance, have been falling for the past three quarters; across industry segments, order book growth has been falling by at least 20 per cent for the past two quarters. Estimates suggest that government capital investment (in infrastructure, mainly) has fallen by 35 per cent in January-June 2011.

Our import bills are not growing any smaller, and the current account deficit will widen (it is estimated to be close to 3 per cent of GDP; the comfort level is 2 per cent). If you are looking closely, the exchange rate got a little worse too: the rupee has depreciated by about 3 per cent already in the last month, and will probably remain weak. Imagine what that will do to our oil import bill.

The monsoon may not be as intense as it should be, but along with the rest of the economic news, it is definitely raining down on our economic parade.

(This story was published in Businessworld Issue Dated 29-08-2011)