India’s economic ambitions checked by 12-year low oil prices

  • HT Correspondent, Hindustan Times, New Delhi
  • Updated: Jan 13, 2016 00:25 IST
The retail inflation went up to 5.61% in December from 5.41% in November on rising food prices. (HT File Photo)

India’s ambitious efforts to stride ahead as the world’s fastest growing major economy touched a greasy pole on Tuesday as oil prices slipped to 12-year low hurtling towards $30 a barrel.

Retail inflation, however, rose to 5.61% in December from 5.41% in the previous month, pushed up by a steady rise in food prices, particularly pulses.

Industrial output, on the other hand, declined (-)3.2% in November, pummeled by a (-)4.4% drop in the manufacturing sector, partly mirroring plunging overseas shipment orders that may have forced factories to cut back production, data released Tuesday showed.

With domestic inflation rising again and exports in a back-to-back 12-month squeeze, India’s economy may be in an uneasy corner despite solid fundamentals ahead of next month’s budget.

While low oil prices may ease India’s import bill substantially, its benefit could be likely offset by a worldwide demand crunch led by a Chinese slump, as also a wobbly domestic industrial sector.

Though India crawled out of global market-led rout in since 2008, the fears this time are over a real economic crisis that may take longer to heal, experts said.

Industrial output may have fared poorer in December with data from a monthly survey released last week showing manufacturing activity in factories slowed down to a two year low last month, as floods in Chennai halted production in many units.

The Nikkei India Manufacturing Purchasing Managers’ Index (PMI), compiled by Markit, fell to 49.1 in December from 50.3 in the previous month indicating faltering business conditions. PMI is a metric to measure industrial activity capturing output to sales. A reading below 50 indicates contraction in factory output.

International benchmark Brent crude prices dropped to $30.43 a barrel on Tuesday, a level last seen in April 2004.

Crude prices have nosedived more around 20% since the start of the year, pulled down by a production glut, weak demand triggering by a slowing Chinese economy, and a rising dollar.

Saudi Arabia and a few other Gulf countries have resisted moves from within the Organisation of Petroleum Exporting Countries (OPEC) to cut supplies to arrest the slide in prices to guard its market share even though this has hurt revenues.

Experts cautioned India’s recovery could be bumpy and inconsistent, even though it may still acquire the status of the world’s fastest growing economy.

Consumer durables output in November grew 12.5%, reflecting rise in car sales that usually peak during Diwali, but it may be too early to fit a trend.

“A 12.5% growth in consumer durables, although comforting, disparity in growth across sectors show industrial recovery is still uneven and investment revival will take some more time,” said Devendra Pant, Chief Economist, India Ratings & Research, a ratings firm.

India’s stock and currency markets have fallen sharply since the start of the year, broadly on the lines of the global markets that have slid on worries over China, which has devalued its currency—Yuan—to keep its exports competitive.

The rupee’s and equity markets’ fall on Thursday in India are signs of anxiety about the likely impact of the yuan’s devaluation.

A weaker yuan have raised concerns of dumping—when goods are exported at prices far below what it charges in its home market, or its cost of production.

Imports from China have jumped by one-fifth to $60 billion in 2014-15, compared with a year ago, while exports have plunged to $12 billion, leading to a huge trade gap between the two countries.

“A weak Chinese currency may hurt India’s exports by making them uncompetitive in the global market,” said Ajit Ranade, chief economist, Aditya Birla Group.

“We have to focus on domestic consumption-led growth,” he said.

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