Latest economic data puts the spotlight on India's weak fundamentals

There was reason for some cheer and much gloom in the latest financial data released by the government on Monday (August 12). Though exports rose 11.64 per cent in July over the same month last year, the current account deficit (CAD) showed no sign of shrinking.

Finance Minister P. Chidambaram acknowledged that the CAD was source of "genuine concern."

Retail inflation for July stood at 9.6 per cent, slightly lower than 9.87 per cent in June, but still uncomfortably high.

The index of industrial production (IIP ) or 'factory output' for June fell by 2.2 per cent over the same month last year. Manufacturing and mining slid by 4.1 per cent and 2.2 per cent respectively, while electricity generation remained exactly the same. Thirteen of the 22 groups covered in the manufacturing sector showed negative growth.

Growth in consumer durables fell by 0.5 per cent, while consumer goods dropped 2.3 per cent, reflecting weak consumer demand. This in turn is likely to affect the hiring outlook of companies, among other corporate decisions.

 "The continuous de-growth in manufacturing will impact the employment scenario," said Naina Lal Kidwai, President, Federation of Indian Chambers of Commerce and Industry.

Indeed, many were sceptical about the improved export figure. "It could well be a temporary blip," said Biswajit Dhar, Director General, Research and Information System for Developing Countries, an autonomous institute under the external affairs ministry. "One will have to wait a few months to see how this pans out. We have not been able to capitalise on our strengths in the past."

There was also a 6.2 per cent fall in imports in July. This was largely because of a decline in gold imports, primarily due to the Reserve Bank of India's efforts to curtail gold purchases. The RBI had increased import duties to curb India's demand for gold and thus bring down the CAD.

There is an overwhelming sense of scepticism around Chidambaram's claim that India will be able to contain its CAD at 3.7 per cent of GDP.  "Even though India's current account deficit should narrow, it will remain large and financing it will remain difficult," stated a NOMURA Financial Advisory and Securities India Private Limted Report.

With elections due in May 2014, India will soon go into election mode, which will make the finance minister's job all the more difficult.