The crisis is still not over
Bring down the cost of capital and slash borrowing costs to kick-start investment.india Updated: Nov 12, 2012 23:10 IST
Here’s more proof that all’s still not well with the Indian economy. Latest data released on Monday showed that factory output contracted by 0.4% in September, confirming signs of a crippling industrial slowdown. The main reasons for the payback in industrial output growth this month were a larger-than-expected contraction in capital goods and considerable weakness in the consumer goods segments. In the absence of real-time investment data, which by definition can be collated only with a lag, capital and consumer goods output offer the closest approximation to incremental asset creation activity and people’s shop-end spends. A reduction in both of these can therefore imply two basic trends: companies are deferring investment plans and people are putting of purchases. Any textbook primer would tell us that firms’ decision to invest, pretty much like the prices of most commodities, are largely governed by the laws of demand and supply. Stronger demand for the goods that it produces will prod greater investment and, on the other hand, lower purchases lead to muted demand, ceteris paribus, will prompt firms to postpone plans to add additional production lines.
It’s not just Indians who are not buying enough. India’s exports have also fallen by 1.63% in October, the sixth successive month of such contraction, as orders dry out from Europe hit by sovereign debt worries and a wobbly political situation. Shrinking shipment orders have implied that exporters haven’t been able reap the benefits of a weakening rupee that had slid to record lows. A persistent fall in exporters’ incomes isn’t good news for millions of Indians whose livelihood depends on small factories peppered across the length and breadth of the country. This has hurt spending, partly explaining why people aren’t really splurging this Diwali, as high prices and slower income growth make getting by harder for hundreds of families.
For finance minister P Chidambaram and his team of financial administrators, the latest set of data adds to an array of problems, graver than the lukewarm Diwali sales. Policy-makers at New Delhi’s North Block and Mumbai’s Mint Street have to negotiate through a maze of thorny issues. The RBI has so far withstood mounting pressure from the government and industry bodies to cut interest rates. The central bank has warned that the Indian consumer is set to feel the pinch of high prices well into next year, even as it took the knife to its economic growth forecast. But with alarming signs of a widening stress on the government’s fiscal position, it’s critical to nudge companies to spin jobs and income. Bringing down the cost of capital and slashing borrowing costs could well be a prudent starting point to kick-start investment.