Danger of contraction in the near future.
By R. Chandrasekaran
CHENNAI: As the order book witnessed a drop in tune with the economic slow-down and the tight money supply in circulation, Indian factory output took a beating in July, thereby threatening to contract anytime, maybe even in August.
The HSBC Manufacturing Purchasing Managers’ Index or PMI slacked in July to 50.1 from 50.3 in the preceding month, threatening to breach the 50 mark for a contraction. Any reading below 50 is considered a contraction as July data was hurt by a fall in factory order books to indicate the most in more than four years’ time.
The factory output recorded a drop for the third straight month in July. This is a clear indication of what is in store for the Indian economy given the fact that the economy performed worst in a decade in the fiscal year ended March 2013.
While meeting the Prime Minister Dr. Manmohan Singh a few days back, Federation of Indian Chambers of Commerce and Industry (FICCI) and captains of the industry called on the government to make efforts to revive industrial investments. The July PMI indicates their fear of weakening industrial output.
Commenting on the PMI data, HSBC chief economist Leif Eskesen has reportedly said, “Activity in the manufacturing sector was broadly flat in July. Output fell by less, but order flows weakened led by slower growth in export orders.” He added, “The data suggests that RBI will likely have to keep policy rates on hold for a while given lingering inflation risks and that the recently introduced currency stabilization measures will not be lifted anytime soon.”
Strangely, there was an indication that employment rose modestly in July.
The policy makers are groping in the dark as any efforts to promote one front impact another unfavorably. For instance, if the central bank cuts the interest rates, rupee will weaken further. To protect the Indian currency, the government has sacrificed growth prospects.
India’s exports never matched with the imports as it will have to foot the oil bill, which takes a toll. As a result of being a net import country, any further drop in Indian rupee will escalate the import bill resulting in further deterioration of current account deficit. The government is trying hard to do a balancing act but is struggling to keep the balance, thus impacting growth.
To contact the author, email to rchandrasekaran@americanbazaaronline.com