Industrial production growth in September recovered to a "more encouraging"—as finance minister P Chidambaram described it on Wednesday—4.8% from the abysmally low 1.3% recorded in August 2008. But even as the Manmohan Singh administration works overtime to prevent the liquidity squeeze from affecting growth in the real economy, the short-term outlook remains cloudy as key economic indicators point to a gloomier October and November.
Total freight carried by Indian Railways—a significant indicator of domestic economic activity—in the month of October fell more than 5% short of its budgeted target to 66.08 million tonne. Importantly, freight traffic was 0.14% lower this October than a year earlier. Indian Railways is the largest carrier of iron ore, cement, steel, fertiliser and foodgrain in India. So, a slowdown in rail transportation levels indicates a corresponding weakening of overall economic activity.
Official economic data released this week already indicates that October will also be bleak, with exports dipping by 15% and indirect tax collections (including excise and customs duties) shrinking by 5%. The trends will impact the country's GDP growth rate for this fiscal, which the Reserve Bank of India has projected at 7.5%. Saumitra Chaudhuri, member of the Prime Minister's Economic Advisory Council, expects the bad news to spill over into November.
"With credit being a problem, October was quite a disaster. Economic activities ground to a halt because of the funds crunch. The problem seems to be continuing in November and it doesn't seem likely to improve before December. The government needs to ensure that money flows into NBFCs and mutual funds so that they can restart financing," Chaudhuri told FE.
For several industries across sectors, the slowdown is already here. Cement sales grew in October, but by a mere 4%. The auto sector saw October sales for commercial vehicles fall by almost 35%, two-wheeler sales shrink by 10%, and overall domestic sales fall by 15%. While automakers are responding by curbing production and shutting manufacturing plants, analysts expect a further impact on production levels in the metals and mining space, as prices of key inputs like iron ore have been on a slide. The one sector that bucked the trend was telecom, with GSM operators adding a record 8 million subscribers in October.
"It is very clear that industrial growth is weakening. The underlying trend is one of decline," surmises DK Joshi, principal economist at rating agency Crisil. Most economists expect economic growth, which was 7.8-7.9% in the first six months of 2008-09, to slow to 5.0-5.5% in October. But if the situation in October continues, growth for the entire year would come down further from the 6.5-7% levels expected currently, they warn.
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