Shrinking growth, weakening Rupee and RBI's plans

 

Indian industry contracted 5.1 per cent in the month of October, the first time industry contracted since June 2009, with rain-hit mines reporting production losses and a sharp over 25 per cent contraction in capital goods production.
October figures however, could well have been an aberration partly because capital goods had grown by a high of 21.1 per cent last October against which the figures are being calculated, and partly because October is a month with many holidays, which firms often use to produce less to bring down inventories.
Production of all kinds of goods – basic, intermediate (which go into making other goods), consumer durables like cars and television sets and consumer non durables like soap and tomato ketchup – contracted slightly varying from 0.1 per cent to 1.3 per cent. Mining which remained hit by heavy rains which held up production in August through October, also reported a 7.2 per cent contraction. 
However, as a number of economists with whom I spoke today pointed out, “the rate of moderation may be explained as an aberration but the fact that there is a moderation in the rate of growth of Indian industry cannot be denied.”
The seven month period from April to October 2011 told a story of marked slowdown – compared to a 8.7 per cent growth in industrial output last year, this year’s first half posted a 3.5 per cent growth in industry.  Consumer goods grew just 0.6 per cent during this period compared to a 8.6 per cent growth during the same period last year. Durables like TV and cars had grown 15.7 per cent April-October, last year, but this year  growth was a mere 4.5 per cent. 
To make things worse, the poor industry data, sparked off heavy sales on the Mumbai stock market. The Bombay Stock Exchange's Sensitive Index fell 343.11 points in one single day when the data was announced- December 12, 2011. A fall of some 2.1% .
This in turn saw the Indian rupee falling to a record low against the U.S. dollar as foreign institutional investors who were the biggest sellers on the stock market, converted their rupees into dollars to take out of the country.
India Inc., naturally hit panic buttons with a flurry of statements about `The Crisis' (no more looming crisis). The Congress-led government of course kept trying to cool down nerves by pointing out that the India growth story still remained valid, but few seemed to buy it.
ICICI Securities in a note said : “Industrial sector has suffered a series of supply side issues this year, which has seen the output decline sequentially in six out of the first seven months of the financial year. Over and above the supply factors, demand moderation which was sporadic at the beginning of the financial year has gathered momentum as the months passed.”
What that means in plain-speak is that industry has slowed down and that demand too is slowing down. The reason, many especially business leaders, say is the Reserve Bank of India policy of ratcheting up interest rates which has made it tough for buyers of cars, homes, other big ticket items like plasma TVs, refrigerators, air contioning etc., to borrow and buy. Just as it has made it tough for businessmen to borrow to set up factories or expand existing ones.
RBI has increased interest rates some 13 times since  March 2010 by the Reserve Bank of India in a bid to batter down rising prices. This in turn translated to actual lending rates to consumers and businesses of between 12-18 per cent.
However, the government does not seem for the time being inclined to reduce interest rates as its worried that speculators in the food market could borrow cheap and use the money to raise food prices, a politically sensitive issue ahead of key polls to states which include Uttar Pradesh. One way out could be for the RBI to cut Cash Reserve Ratio or the amount of money banks have to compulsorily keep with the central banker,  in order to release fresh money into the economy.
Despite the tight money policy followed by the RBI, the headline inflation stood at 9.73 percent in October, remaining above 9 percent for nearly one year. So many reason, that while interest rates can be kept high to sap up inflationary tendencies, at the same time more money can be released to industry which seems to be demanding finance or refinance. However, how wise this would be is something only time will tell. Much of that demand is coming from sick firms like Kingfisher who may or may not be able to pay back banks the money borrowed plus the accumulated interests.