The industrial production contracted for the second consecutive month, shrinking by 4.3 percent in September with weakness across sectors. In fact, it hit the lowest level of almost eight years.
It was much weaker than a poll of analysts conducted by CNBC-TV18 which was pegged at negative 1.9 percent and contraction of 1.4 percent in August.
The growth in the mining segment fell to a multi-year low of (-8.5 percent against 0.1 percent MoM). In sync with the slowdown in the economy, manufacturing IIP also contracted by (-3.9 percent against -1.2 percent MoM) led by large sectors.
From the use-based classification side, capital goods, consumer durables, infrastructure and construction goods, and primary goods led the slowdown, contracting by -20.7 percent (against -21 percent MoM), -9.9 percent (against -9.1 percent MoM), -6.4 percent, and -5.1 percent (against 1.1 percent MoM), respectively.
Consumer non-durables, which were holding up to an extent, also fell marginally by -0.4 percent during September against 4.1 percent in August. Among the positives, growth in the intermediate goods production was unchanged at 7 percent MoM.
Consequently, IIP growth for July-September period was also poor at negative 0.4 percent as against 3 percent growth in June ended quarter.
As a result, India’s gross domestic product (GDP), which grew 5 percent in April-June 2019 – the lowest in last six years -, is expected to decelerate further in the September quarter. Hence, the full year growth may be 5 percent or around, experts feel.
“After a disappointing start to Q1FY20 amid a consumption and investment-led slowdown, high frequency indicators suggest that economic activity has worsened in Q2FY20, despite a pick-up in government spending. We now expect Q2FY20 GDP growth at 4.7 percent (5.2 percent earlier),” said Kotak.
Sajjid Chinoy of JP Morgan has also marked down their Q2 GDP forecast to 4.7 percent.
“This entails mark down to sequential growth of 40-90 bps over the next few quarters. While we now expect sequential growth to bottom in Q3CY19, the recovery that is forecast is shallower than previously envisioned, given that financial sector resolution is taking longer than had been expected, resulting in commensurately lower monetary policy efficacy, with fiscal space severely constrained,” he said in an interview to Moneycontrol.
Government sources has also told CNBC-TV18 that it is almost certain that Q2 GDP would be below 5 percent, which would impact annual GDP forecast further, though there could be improvement from Q3 onwards.
Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI expects Q2GDP growth at 4.2 percent.
Hence, experts have revised their full-year growth estimates down to 5-6 percent and expect the Reserve Bank of India (RBI) to cut their full-year growth forecast from 6.1 percent (revised from 6.9 percent in the October meeting). The government has announced several measures including a cut in corporate tax rate which will reflect gradually in growth from the second half of 2019 onwards.
“Even though the government has announced corporate tax rate cuts and a new fund to support stalled projects, they are unlikely to contribute substantially to growth in the near term in the absence of demand. Economic activity should improve somewhat from second half of FY20 due to favorable base effects, lower policy rates amid easier liquidity conditions and government spending. However, weak momentum would result in a much weaker FY2020 GDP growth print than what we had initially envisaged. We therefore revise down our FY2020 GDP growth estimate to 5 percent (5.8 percent earlier),” said Kotak.
Ghosh revised the GDP forecast for FY20 to 5 percent from 6.1 percent earlier while Chinoy sees full-year growth to 5.8 percent, revised down from 6.2 percent previously.
In October, Moody’s Investors Service cut the GDP growth forecast for FY20 to 5.8 percent from its earlier estimate of 6.2 percent, citing the deceleration to an investment-led slowdown that has broadened into consumption, driven by financial stress among rural households and weak job creation.
The global rating agency also downgraded India’s credit outlook to negative from stable.
With industrial production hitting its lowest level in almost 8 years, the chorus for another rate cut gets louder as most economists expect steep 50 basis point cut is a possibility even as they fear that the Centre could miss the 3.3 percent fiscal deficit target.
“We now expect larger rate cuts from RBI in December policy. However such rate cut is unlikely to lead to any immediate material revival, rather it might result in potential financial instability as debt financed consumption against an increasing household leverage had not worked in countries and India cannot be an exception,” Ghosh said.
Kotak continued to expect the MPC to cut the repo rate by another 50 bps in the rest of FY2020 as some of the increase in food inflation is seasonal and abundant rainfall should lead to lower food prices ahead.
Even though the CPI inflation could overshoot the Monetary Policy Committee’s target of 4 percent by 50 bps in the next few months, the core inflation is likely to remain moderate. Therefore, the MPC may assign a higher weight to reviving growth, according to the brokerage.Get access to India’s fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code “GETPRO”. Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.
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