Is the End of India nearing?

Tue, 14 Jan Pre-Open

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We recently authored an article along the metaphor End of India. It is about the crisis we are going to face in the future and how one should be prepared for it. Considering how few macro-economic data points have evolved lately it seems that the End of India is nearing.

Two macro data points, namely index of industrial production (IIP) and trade deficit, were published last week. And the figures were worrying to say the least. The IIP figure, for the month of November 2013, contracted by 2.1%. Such a sharp fall led the year to date figure into the negative territory. While it is understood that high interest rates have delayed capex cycle and impacted industrial production, the most worrying factor in November's month fall was the performance of the consumer durable segment.

The consumer durable segment contracted by 21.5% during the month of November. This was despite the festivities in that month. Contraction in white goods demand during the festive month indicates that inflation is hurting the pockets of the common man and consumers are willing to postpone their purchases. India being a consumption story, these are ominous signs. Until now, the growth was suffering due to lack of investment. However, with white good demand faltering, the consumption story has also weakened a bit.

Apart from IIP, the trade deficit figures were also announced recently. While the deficit stood at US$ 10 bn for the month of December and was down on a YoY basis, imminent risks to the rupee from further tapering remain. A depreciating rupee can make imports costlier and widen the deficit. Thus, the December month figure could well be just a breather and deficit figures can deteriorate further. Also, with IT exports dwindling, and oil & gold continuing to top the import list, the deficit is likely to be worse than better.

Another impediment for India is that it cannot tinker with interest rates to boost growth as inflation is ruling high. The consumer price inflation (CPI) for the month of December is seen in double digits. Thus, it is unlikely that RBI will reduce rates in the next policy review. External factors like impending elections and Fed taper are posing risks to the economy too. In short, the Indian economy is currently very fragile.

While just a couple of data points like IIP for a single month does not indicate a cyclical downturn in the long run, the fact is that the Indian economy has too many ills afflicting it. It needs medication. Better governance and a benign interest rate environment can be effective pills. But it seems that the political parties (read doctors) have forgotten their duty. Whether the new government that will assume office after this year's general elections will be able to turn the tide for the better remains to be seen.