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Industrial slowdown may last longer

NetScribes/R Radhakrishnan

It's happened. Industrial slowdown is here. The bad news is that it could stay longer than expected. Economists say that in addition to reconciling itself to a slowdown, the country will also have to brace itself for more bad news: a rise in inflation, and a weaker rupee, to begin with.

"The recovery, if any, could possibly happen only in the last quarter of the current financial year," says Madan Sabnavis, chief economist at ICICI.

"Inflation, which is currently at 6 per cent, is expected to go up further in the coming weeks once the oil price and freight rate hikes get reflected," feels Sridhar Narayan, fund manager at Zurich India Mutual Fund.

The government had earlier dismissed warnings of a slowdown, conveniently pointing to a rise in non-food credit. Non-food credit is usually disbursed to meet the working capital requirements of the industrial sector. So a higher non-food credit would indicate a corresponding growth in industrial production. But the index of industrial production has actually slipped from 6.2 per cent last year to 5.3 per cent.

A lion's share of the non-food credit actually found its way to the oil companies to help them meet the working capital shortfall caused by a delay in the disbursal from the oil pool account.

The decline is more pronounced in the capital goods sector, which has shown a negative growth of 0.8 per cent in the current year, compared to a 12 per cent growth last year. Excise and customs duty collection, which registered a growth in the first quarter, also slowed down in the second quarter despite a sharp rise in oil prices.

"The current situation is not alarming, considering the higher base figures last year. The growth rates of 8 per cent witnessed in the previous years were an aberration. We should be happy if we manage to clock an annual industrial growth of 6 per cent in the current year," says Sabnavis.

Rising oil prices are seen delaying the recovery further. The inflationary effect on account of the rise in oil prices could be felt for the next two years, says Sabnavis. The cost push due to the oil price hike is an estimated 2-3 per cent.

The government recently hiked petroleum product prices to temporarily plug the oil pool deficit. This has, in turn, pushed the inflation rate higher to over 6 per cent. The problem, however, is that international crude prices are expected to rule high.

"If crude rules above $30 a barrel, the rupee will continue to be under pressure. The $4-billion inflow from the India Millennium Deposits will, no doubt, ease the pressure for some time. But given the fact that portfolio inflows and foreign direct investment are expected to be lower, we see the rupee touching Rs 47 to a dollar by the end of the year," says Sabnavis. FII inflows are expected to be around $1.5 billion this year as compared to $3 billion last year.

Will a weakening rupee and higher inflation call for an upward revision of interest rates? No, say the economists. The reason: with industrial growth slackening and agricultural growth tapering off, the fund requirements for capital investment will slow down.

"There is no need to revise lending rates. If the need for funds rises, Reserve Bank of India can adjust this by a marginal 0.5 per cent cut in cash reserve ratio, which will release Rs 40 billion into the system," says Sabnavis.

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