Bumps Ahead ; the Economy Is Slowing Down, but the Long-Term Story Remains Intact.

Summary

---

Bumps Ahead

The economy is slowing down, but the long-term story remains intact.

See the full content of this document

Extract

---

Bumps Ahead ; the Economy Is Slowing Down, but the Long-Term Story Remains Intact.

By Rishi Joshi

These are early days yet, but there are signs that the appreciation of the rupee and the Reserve Bank of India's tight monetary policy, which is resulting in higher interest rates, are hurting overall economic growth. The economy seems to be showing signs of wear and tear; the latest Index of Industrial Production (IIP) data for September are disappointing. IIP growth is down to 6.4 per cent, compared to 12 per cent last September. This is the slowest industrial growth recorded since October last year, when the index rose 4.5 per cent. The main culprit is the manufacturing sector, which decelerated to 6.6 per cent compared to about 13 per cent in September last year. The consumer durables segment, in particular, has been hit hard, registering a 7.6 per cent fall in output in September. There's more bad news. For the first half of this financial year, IIP growth fell to 9.2 per cent, against 11 per cent last year.

So, is the Indian growth story slowing down? Finance Minister P. Chidambaram doesn't think so. Putting up a brave front, Chidambaram said people should "take a long-term view" and reiterated that the services and manufacturing sectors are likely to grow at 10 per cent this year. He also pointed out that the capital goods industry "retains its vibrancy". Economists, however, don't share the fm's optimism. They attribute the manufacturing slowdown to high interest rates, appreciating rupee and cheaper imports from countries like Thailand and Malaysia. Says Siddhartha Roy, Economic Advisor, Tata Group: "It's now evident that higher interest rates are hurting domestic industry. This is already apparent in the auto and consumer durables sectors. Capital goods, however, are unlikely to be impacted immediately as most companies are in the midst of the investment cycles." Adds Subir Gokarn, Chief Economist, Standard & Poor's, Asia Pacific: "We could be headed for a moderate slowdown due to the higher interest rates."

Then, the strengthening rupee is beating down Indian exports, forcing many exporters in labour-intensive industries like textiles, leather and handicrafts to downsize drastically. The Federation of Indian Export Organisations estimates that almost 8 ...

See the full content of this document

---