As a shocking admission of the slowdown in the Indian economy the Jan’12 IIP numbers were revised down from …..hang on…. from a high 6.8% to 1.1%.The Finance Minister was quick to quote his “unacceptable” remark again. Remember that this is the same gentlemen who goes on stating the high inflation numbers as being “unacceptable” for the last one year. Apparently the blame is being laid on the doors of the Directorate of Sugar (yeah we even have a separate department for that) for incorrectly stating that the sugar production at 13.4 Million tonnes instead of the actual (for the time being) 5.9 Million Tonnes.
The poor guy seems to have lost his calculator on his way to office and had to depend on the abacus to do his calculations.
Let us look at the more respectable and “acceptable” Feb’12 IIP numbers which came in at 4.1%.Well at least till they are revised downwards in the subsequent months. Manufacturing grew at 4%, electricity at 8%,mining sector grew at a respectable 2.1%,Capital goods grew at 10% while consumer goods contracted at 0.3%.Lets try and decipher these numbers .The first assumption being that the numbers reported by the CSO (Central Statistical Organisation) is correct. That assumption being made let us looks at the capital goods growth numbers for starters. After months of negative growth the capital goods numbers have grown at 10%.This had to happen. Apart from growing from a lower base it is important to note that the Indian economy in spite of slowing down is still growing at around 6%, considering that our GDP is at around $1.8Trillion it means that we are adding around $108 Billion to our GDP this year. This means that aggregate demand for goods and services has grown and will continue to grow at a moderate rate in the near future. This in turn would mean higher production of capital goods which basically is required to produce consumption goods.
Electricity growth numbers are good. The Indian economy cannot grow at a sustained high rate unless there is quality supply of adequate electricity. In fact India is one of the few very big economies where the aggregate demand for goods and services will grow and the only limiting factor for GDP growth rate would be the lack of quality infrastructure. Growth in India would be constrained by supply rather than demand. This is in stark contrast to the developed world where the limiting factor to economic growth is net aggregate demand and not supply. The challenges ahead remain; electricity consumption would peak in the hot summer months when air conditioners are turned on and the harvesting and sowing season kicks in. Since electricity in India is still thermal based the mining sector “read” coal has to pick up to ensure uninterrupted of coal to the power producers. Controversial (FSA) agreement between the Government owned monopoly Coal India and power producers must be ironed out as soon as possible. Signing of the FSA has already been delayed .The initial 31st March deadline it has extended to mid April. Delay’s in getting environmental clearance, political issues and land acquisition issues has ensured that Coal India would be unable to meet the industrial requirement for coal. This would mean that India which has one of the largest proven reserves of coal would have to import coal from Australia and Indonesia. Cost of imported coal being higher (unlike in the pricing of Coal by Coal India the Government of India has no political influence on the pricing of imported coal) this would result in electricity cost going up. The resultant increase in the cost of production would lead to higher prices and higher inflation.
The contraction in consumer durable numbers should not raise any alarm bells ,yet. Unlike the US we are still not a consumption based economy. Individual house holds still have a high savings rate. This is good. We need to save to invest in our future ,our and our future generations. However, a prolonged drop in consumer durables demand would lead to lower factory orders ( doubtful in India’s case) which would then lead to job losses and lower indirect tax revenues for the government. This could in a dooms day scenario send the economy into an unrecoverable tail spin. This as I mentioned remains doubtful. One the Indian economy is still underdeveloped which means that demand for basic consumer durable will remain as ownership/penetration remains low , second with our high savings rate individual house hold can divert a part of their savings to consumption and thirdly consumer demand is cyclical where after completing its lifecycle a product has to be replaced or replenished.
Also remember that capital goods are used to manufacture consumer goods and since capital goods have seen a health growth rate it would mean that producers of consumer goods have budgeted for an increase in consumer good consumption in the medium term while placing their orders for capital goods.
Next week the spotlight switches over to the inflation number and the all important RBI meeting.
Let us see what Mr. Subbarao has in store for us.
No comments:
Post a Comment