NEGATIVE IIP - SPREADS PALL OF GLOOM
By Ruma Dubey
Negative IIP???? This comes as a complete slap from the dark. We all were bracing for a lower IIP but in the positive. No one had ever expected a negative IIP and that too as low as -3.5%. Yes, we are in a downturn and the recovery is going to be very gradual. The FY12 IIP is now estimated at 2.8% v/s 8.2% on a YoY and that is a huge sobering truth which has hit us today morning, especially knowing that this time around there is no Lehman collapse to blame; we cannot push the blame on anyone; this mess belongs entirely to us.
Trend of investment continues to remain slow and this is one data, which has remained consistent in all the IIP data. Part of slowdown in the investment cycle is due to higher interest rates and higher costs. Smaller projects are coming into fruition rather than bigger projects. Pent up demand is there and wherever it can be met, mainly through smaller projects, it is getting done. But unless larger projects take off, we cannot expect investments to pick up.Capital goods as usual is a huge worry. The fluctuation in the numbers on a MoM is extremely disturbing. How can one see such volatility? But as the table indicates, from August, we are consistently seeing the sector almost always in the negative and Feb was a blip when it showed a huge positive growth at 10.6%.
This is sure to look pretty bad for the FIIs who as such currently seem to be pretty disenchanted with India. This dampening data might push them away further unless the Govt steps in and decides to take some corrective steps, which we all know is like expecting the Euro debt crisis to get corrected overnight. Policy apathy will continue; the Parliament is engaged only in debating and adjourning over many other political issues; wonder when work will actually get done?
The RBI’s task has once again become very tough. It gave a generous 50 bps cut when all were expecting a 25 bps and the hunger for more was satiated. But now with these dismal numbers, one wonders if RBI will be forced to cut rates once again on 18th June by another 25 bps. Though RBI is sure to be perturbed about this fall in growth, its eyes will remain focused on inflation. Summer is usually the time when food inflation spikes up. Thankfully crude is lower around $95 levels but the rupee depreciation might remain the prime concern. RBI’s comfort zone for inflation (WPI) is at around 5% levels and that does not seem to be happening any time soon. In March, the CPI rose by 9.47% YoY, much higher than Feb’s 8.83%. If RBI’s focus remains inflation, then there is not too much of a headroom for RBI to cut rates once again on 18th June. But if this negative growth has worried RBI then despite rising inflation, it might just go for a 25 bps rate cut, which will help psychologically.
Inflation will continue to remain a big issue and RBI will cut rates only if it shifts it focus from inflation to growth. Let us see whether RBI has changed its focus or not on 18th June.