Business Today

Contraction in factory output triggers expectations of rate cuts

The unexpected contraction in March industrial production has strengthened expectations among some economists that the Reserve Bank of India could announce significant cuts in interest rates this year.

twitter-logo Shweta Punj   New Delhi     Last Updated: May 14, 2012  | 11:18 IST

Shweta Punj
Shweta Punj
India's factory output contracted 3.5 per cent in March, the first time in five months, taking analysts by surprise as a Bloomberg survey had forecast a growth of 1.7 per cent. The unexpected contraction in factory output, measured by the Index of Industrial Production, strengthened expectations among some economists that the Reserve Bank of India could announce significant cuts in interest rates this year.

"We continue to believe that the RBI will cut the repo rate by a further 75 basis points in the remainder of 2012. We expect a gradual pick-up in activity only by the second half of fiscal 2013, once repo rate cuts by the RBI are transmitted into the system which takes about two quarters," says Tushar Poddar, MD & Chief India Economist, Goldman Sachs, in a report released on Friday afternoon. But this is not a view shared by everyone. According to Moody's Analytics, RBI will be reluctant to slash rates anytime soon if inflation does not recede. Inflation for March 2012 averaged 6.8 per cent.

India's Index for Industrial Production for the year ended on March 31 grew at 2.8 per cent, a much slower pace than 8.2 per cent in 2010-11. A spate of corruption scandals, uncomfortably high inflation for more than two years, high interest rates and the recent budget announcements on retrospective amendment of Income Tax have left investors jittery. The rupee has plunged to touch nearly Rs 55 to a dollar.

Essentially, if we just look at all the economic indicators, it is looking a lot worse than was expected when the Union Budget was tabled in mid-March. Business confidence remains fragile. Dun & Bradstreet Business Confidence Index showed a decline in confidence for the June quarter.  What could perhaps shore up some confidence is if a good monsoon and monetary measures by RBI together can bring down inflation and encourage investment.

Overall factory output in March was dragged down by capital goods (factories, machineries, tools), which contracted 21.3 per cent from a growth of 14.5 per cent in March, 2011. Basic goods production rose by an uninspiring 1.1 per cent. The other two important barometers of Industrial output - mining and electricity sectors - displayed a mixed trend. Mining contracted by 1.3 per cent, while electricity grew 2.7 per cent.

Manufacturing, which makes up most of the factory output, contracted by 4.4 per cent.

Within manufacturing, surprisingly, the publishing, printing and reproduction of recorded media group grew the most at 52.8 per cent, followed by 17.4 per cent in radio, TV and communication equipment and apparatus. A closer look at data shows that Indians are not spending as much on items that are not necessarily essential - production of apparels declined by 57.2 per cent, air conditioners by 49.4 per cent, and leather garments by 33.4 per cent.

Decline in factory output was also signalled in the recent exports data. Exports fell 5.71 per cent in March for the first time in two-and-a-half years on weak demand from Europe and United States.

The latest factory output data is a big climb-down from a robust growth of 15 per cent in industrial production in mid-2009.

Youtube
  • Print

  • COMMENT
BT-Story-Page-B.gif
A    A   A
close