Shweta Punj
The India gloom news bulletin seems to be getting a bit too regular and depressing. The latest in the slew of negative news is the slide in India's factory output for June
by 1.8 per cent.
Industrial production for the April to June period has also fallen, by 0.1 per cent. This despite a 2.5 per cent growth in May.
The contraction in output basically means that factories are not running to their capacity, businesses are not making much money, and employees are facing stagnant wages and high inflation.
In June, manufacturing declined 3.2 per cent while mining grew at a tepid 0.6 per cent. The electricity sector was a silver lining, expanding 8.8 per cent. However, output of the industry group electric machinery and apparatus shrank by a whopping 56 per cent.
In the wake of bad news recently, economists have begun to cut growth forecasts for 2012-13. This week, Citi Research and ratings firm Crisil cut their predictions for the current financial year by a percentage point each.
Citi forecast that growth this year will be 5.4 per cent, and
Crisil's call is 5.5 per cent.
Moody's also revised India's growth forecast for 2012 to a little lower than 5.5 per cent.
June's dismal factory output numbers raise the question whether the Reserve Bank of India will cut interest rates soon to catalyse industrial activity. However, recent statements from the central bank indicate that fighting inflation is its first priority and that it's unlikely to lower rates unless the government takes credible steps to lower its borrowings, which go largely towards bridging the gap between its current revenue and expenses. The central bank's viewpoint is that the government's tendency to keep borrowing to meet consumption is feeding inflation.
P. Chidamabram, who began his third term as finance minister, seems to agree. He promised to ask the chairman of the thirteenth Finance Commission, Vijay Kelkar, to figure a way out of the logjam the government finds itself in.
A
widening fiscal deficit is not the government's only headache. Lack of consistency in policy, infrastructural bottlenecks, problems in land acquisition, and bureaucratic red tape are the other issues that are forcing businesses to scale back and hold expansion.
The largest industry chamber, Confederation of Indian Industry (CII), expressed "serious concern" on June factory output numbers. "The situation calls for urgent policy measures, both by the RBI and government to salvage industry from a further decline in output," said CII Director General Chandrajit Banerjee. Let's hope the new finance minister is listening.
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