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.

Govt has ‘badly lost its way’, hurting economy: Moody’s ‘Weak Centre Has Created Instability’

NewDelhi:The Indian government is the "single biggest factor weighing on business confidence and the economic outlook", Moody's Analytics said on Thursday, revising downwards the GDP estimate for Asia's third-largest economy to 5.5% in 2012-13. 

    It said the economic slowdown in India was sharper and more broadbased than anticipated and was now deeply entrenched across all sectors. 
"There has been little policy response from either the Reserve Bank of India or the government and with the global uncertainty dragging on, we see nothing on the horizon to lift the economy from its funk," said Glenn Levine, senior economist at Moody's Analytics, adding that the second factor was the poor monsoon which was running well below average. 
    The agency, which is a division of Moody's Corporation, said the slowdown was the most pronounced in the country's corporate sector. 
Industry output dips 1.8%, all eyes on RBI 
    Industrial output fell for the third time in four months in June, by 1.8%, leading economists to say the RBI may ease interest rates to spur growth. The manufacturing sector, which accounts for nearly 76% of the index of industrial production, declined 3.2% in June against 11.1% expansion in the year-ago period. Finance minister P Chidambaram said the June IIP data was disappointing and called for focusing on the critical sectors.P 19 
IOC posts biggest-ever loss of 22,451cr in Q1 
    IndianOil Corporation reported the biggest-ever quarterly loss by a listed company, at Rs 22,451 crore, in the April-June period, three times its previous record of Rs 7,485 crore loss registered in Q2 of 2011-12. Hindustan Petroleum, too, saw its bottomline sink by Rs 9,428 crore in the quarter. IOC said the losses were due to the government failing to pay up subsidy on diesel and cooking gas.  BAD REPORTS FOR INDIA 
India's central govt is the 
single biggest factor weighing on business confidence and the economic outlook Confidence among Indian firms has been crushed by weak demand, elevated interest rates, high inflation, and most significantly, the instability created by a weak central government that has badly lost its way 
    MOODY'S ANALYTICS (AUGUST 2012) 
Divided leadership at the Centre may be the biggest hurdle...Paramount political power rests with the leader of the Congress party, Sonia Gandhi... while the govt is led by an unelected prime minister, Manmohan Singh, who lacks a political base of his own 
    STANDARD & POOR'S (JUNE 2012) India needs bold steps, not quick fix: Moody's 
    Confidence among Indian firms has been crushed by weak demand, elevated interest rates, high inflation and most significantly, the instability created by a weak central government that has badly lost its way," Glenn Levine said in the Moody's Analytics report titled 'India Outlook: Below Potential'. The agency lowered the growth estimate for 2013 to 6% from the previous estimate of 6.2%. 
    In June, global ratings agency Standard & Poor's had cautioned that India could be the first among BRIC countries at risk of losing its investment-grade rating due to slowing GDP growth and political roadblocks to reforms. S&P had said that a divided leadership at the Centre might be the biggest hurdle to reforms. 
    The deficient monsoon and slowdown in economic reforms have added to the gloom and led to a raft of downgrades on GDP growth for 2012-13. 
    Moody's Analytics said in its report that the prime minister has one final opportunity to salvage his legacy. "With two years left in office, Prime Minister Manmohan Singh must turn things around quickly or risk becoming a lame duck for the remainder of his term, leaving behind a legacy of missed opportunity," Levine said. 
    The Congress said the government was taking all steps to enable the economy to return to a high growth path. "All the steps needed for India to return to a high growth trajectory are being taken. However, we cannot be oblivious to the fact that a sluggish global economy does impact us too. But the prediction made by Moody's seems a stretch and perhaps betrays a lack of understanding about the robust fundamentals of the Indian economy," party spokesman Manish Tewari said. 
    But the Moody's Analytics report gave a fresh handle to the opposition to slam the government on its reforms record. "For all practical purposes, the PM is already a lame duck. He doesn't lead either in Parliament or outside," BJP leader and former finance minister Yashwant Sinha said. "I must confess that I find these comments on India's PM very humiliating. But it cannot be denied that while the government may try and hide the truth from our own people, keen observers abroad are not deceived." 
    Levine said finance minister P Chidambaram was making all the right noises, with pledges to curb the government deficit and lift business confidence and investment but bold measures were needed to revive and restore the health of the economy. 
    "While we applaud the intent of the new finance minister, it all has the feel of being a quick fix, last-ditch effort to avert the economy from its downward spiral. But an economy is a complex combination of millions of different units—households, firms, government entities and so forth—that cannot be easily manipulated using tricks or quick fixes, at least not over a prolonged period," Levine said. 
Times View: Act, don't just react 
    This is only the latest in a long list of individuals and institutions who have been saying much the same thing – government inaction is costing the economy dearly. It would be a mistake for the government to bristle at this suggestion, as it has more often than not done in the past, and get defensive about it. It must come to terms with the fact that there is a widespread perception of paralysis, and one that is not baseless. The best way to react to such a perception is to seek to dispel it with action. No amount of denials or announcements of pious intentions can substitute for concrete action.