India:Rate Cut, Reform Calls Get Shriller Downgrade Looms as Industry Output Falls

Pressure mounts on Chidambaram to act fast as industrialproduction drops 1.8% in June, with capital goods slumping 28% & manufacturing 3.2% OUR BUREAU NEW DELHI      Industrial production contracted by a surprising 1.8% in June, raising the spectre of the first sovereign ratings downgrade for India in more than a decade, soon after a slew of reductions in growth forecasts. The news will ratchet up the pressure on P Chidambaram, who recently took over as finance minister and has promised urgent measures to revive the weakening economy. The contraction in the index of industrial production — the third time in the last four months — led by a slump in the manufacturing sector was worse than the most pessimistic of forecasts, and chimed in with mounting anecdotal evidence of industrial stagnation. "The government needs to do something large and meaningful soon... Otherwise, S&P (etc) may find it very difficult not to downgrade us," said Jahangir Aziz, a Washington-based senior Asia economist at JPMorgan.  International ratings agencies have not lowered India's credit rating — a notch above investment grade — for nearly 14 years, although some of them did cut their ratings outlook in recent months following the progressive decline in the country's economic indicators. The last ratings downgrade took place after the 1998 nuclear tests.  Overall, for the first quarter as a whole, IIP contracted by 0.1%, and analysts say it is all but certain that the first quarter GDP growth numbers, due on August 31, will now come in well below 6%. In the last quarter of the previous fiscal year, GDP growth plunged to a nineyear low of 5.3%. While the government is still to make any changes in its forecast of at least 7.35% growth for the year, several independent forecasters have cut their estimates, many to levels around the 5% mark. Moody's Analytics was the latest on Thursday, cutting its forecast to 5.5%. The plunging IIP, which came on a day neighbouring China reported its July industrial output had dropped to 9.2% from 9.5% in June, drew widespread calls for urgent action by the authorities — from interest rate cuts to headline-grabbing reforms. Chidambaram called the IIP figures disappointing, underscoring the need to focus on critical sectors, remove bottlenecks and give a fillip to production. Economic Reforms Politically Difficult  "Supply-side constraints upon manufacturing and exports must be removed in double quick time," he said in a statement. The finance minister's ability to do something dramatic could be rendered difficult by political difficulties. The government faces challenges to push economic reforms because many within his own Congress party and the wider UPA coalition do not favour anything drastic that could upset voter constituencies ahead of a string of state elections culminating in the general elections in 2014. The Opposition, seeing the ruling coalition divided, is also unlikely to oblige. With poor monsoon rains creating drought conditions in many parts of the country, the outlook for inflation does not look promising either, say analysts. This, while exacerbating the government's already battered fiscal position, will give the Reserve Bank of India very little comfort to consider any monetary easing. Food inflation is already in double-digit territory and expected by analysts to rise further, making chances of a rate cut by RBI at its next policy meeting in mid-September next to impossible. The drop in the June industrial output was largely because of a steep contraction in the manufacturing sector index, which accounts for 75.5% of the overall index and fell 3.2% after growing 2.6% in May. A year ago, the manufacturing index had grown 11.1%, exaggerating the impact of the latest drop. The mining sector showed an expansion of 0.6% while electricity generation grew 8.8% in June. Consumer durables output expanded 9.1% in June while nondurables contracted 1%.  "(The) non-durables output growth contracted from an already subdued 1.3% in May,      suggesting  high inflation may have reduced demand for non-discretionary consumption as well," said Sonal Varma, economist at Nomura.  Amid all the gloom talk, some economists drew comfort from the details, pointing out that the volatile capital goods segment had exaggerating the fall in industrial production. The overall capital goods sector fell 27.9% in June, affected negatively by the base effect from last year. Within the capital goods category, the electrical goods category fell 56% in June, dragging down growth. "The details of the industrial production are not as bad as the headline number," said Madan Sabnavis, chief economist, CARE Ratings. We Need a New Index  The government has lost faith in the people, dissolve them and elect a new people, poet Bertolt Brecht suggested once. The Index of Industrial Production has lost confidence in Indian industry; it has given it zero growth for the first quarter. Should we conjure up a new industry? Or should we get ourselves a new index that reflects reality? Consumer nondurables have been stagnant, says the index. FMCG companies have reported brisk business. Electrical machinery has fallen 56% in the index, BHEL and ABB reported decent Q1 numbers. The results of listed companies are more credible than IIP's datagathering. We need a new index.