Q2FY15 - GIVES RBI MORE BREATHING SPACE
By Ruma Dubey
The Q2FY15 GDP numbers was expected to be mostly around 5% or some even less than 5%, at around 4.9%. So when the number came in at 5.3%, it was touted “much better than expected!” Though sequentially, the number has actually gone down.
The big drag this time has been manufacturing which came just about managed to hold on to above 1% mark at a measly 0.1% - a huge drop down from 3.5% in Q1. The IIP numbers of past three months – July, August and Sept have indicated that there was trouble ahead. The falling consumer durable and non-durable demand just got further fortified in this low manufacturing number.
The market is completely unmindful of all these facts as it is now focused on falling international prices of crude and entire attention is on 2nd Dec – will RBI reduce rates now that inflation is falling and crude is also down? The market has almost assumed that a rate cut is certain. But if anything, at this juncture, with these GDP numbers, the RBI can actually rest easy and not hurry with a rate cut as growth is down but not exactly hurting. As rightly said by the RBI Governor, it is better banking practices which can bring down rates. He said that fixing legal loopholes in the financial system that helps unscrupulous promoters game the system, will do a lot more to bring down borrowing costs than monetary policy actions. Instead of bringing down rates, he has rightly suggested introduction of monetary incentives for members of Debt Recovery Tribunals (DRT) that bring down the duration of hearing of cases, a limit on number of stays that courts can grant against recovery of loans, making appeals against DRT orders costly as well as introducing a whole new bankruptcy regime.
And realistically speaking, what can a token 0.25 or even a 0.5% rate cut do at this juncture apart from improving moods. China reduced rates but it has proven to be of little use at this juncture for the country. Ditto for India. We do not need any mood improvement now – we have more than enough of that. What we really need to see now is all the talk getting transformed into action. Reforms need to take off and not get stalled in the Parliament. The Finance Minister might try and cajole the Governor the reduce rates but fiscal prudence demands that he does not give in to any pressure and stick to the right course.
The internals of the Q2FY15 data shows that as per data provided by the Department of Agriculture and Cooperation (DAC), the First Advance Estimates of Production of foodgrains, Oilseeds and other Commercial Crops for 2014-15, production of cereals, pulses and oilseeds recorded a decline by 6.6%, 13.6% and 12.2% respectively during the Kharif season of 2014-15 v/s 2013 -14 kharif. Apart from production of kharif crops, the growth in ‘agriculture, forestry & fishing’ estimates of GDP in Q2 are based on the estimated production of fruits and vegetables, other crops, livestock products, forestry and fisheries.
On the industry front, the key indicators of construction sector, namely, production of cement and consumption of finished steel registered growth rates of 9.8% and 0.3% in Q2FY15.
Among the services sectors, key indicators of railways, namely, the net tonne kilometers and passenger kilometers have shown growth rates of 6.3% and 1.1% respectively for Q2FY15. In the transport sector, the sale of commercial vehicles, cargo handled at major ports, cargo handled by the civil aviation and passengers handled by the civil aviation registered growth rates of -3.8%, 4.3%, 11.6% and 12.6% in current Q2. Total stock of telephone connections including (Wireline and Wireless) registered growth of 6.5% in Q2. The other key indicators, namely, aggregate bank deposits, and bank credits have shown growth rates of 13.1%, 10.1% respectively as on September 2014 -15.
Well, this economic data might even register with the market when it opens on Monday as all its focus will be only on 2nd Dec. Let’s see whether the Governor sticks to fiscal prudence or gives in to pressure.