2011 When macro events ruled markets

VIDYA BALA

A round-up on how some of the key macro indicators moved this year seems to be in order to get a sense of what they signal for Corporate India. News of FII investments or big-ticket investors' entry and exit from stocks no longer excites the stock market. It is the economic indicators that investors seem to watch like hawks. On December 12, for instance, after the index for industrial production (IIP) declined 5.1 per cent over a year ago, markets panicked and caused the Sensex to fall close to 350 points. A round-up on how some of the key macro indicators moved this year seems to be in order to get a sense of what they signal for Corporate India.

Manufacturing slump
The IIP, a measure of industrial activity in the country, yo-yoed in 2011. Buoyed by a bounce-back in capital goods and strong consumer goods demand, it managed a decent 7 per cent average run rate (over respective year-ago numbers) every month until June. But then the downward move began. There was a dip in mining activity, erratic capital goods production and slower growth in consumer durables. At last count, the (absolute) index value had declined by 10 per cent between January and October 2011. So is the situation worse than in 2008? It would seem so because in the IIP low of November 2008, the index had contracted only 7.3 per cent for an 11-month period that year. The difference in performance then and now can be attributed to strong capital goods numbers (with slump coming in later) and growth in mining work supporting production activity in 2008. Both these segments show a decline now. Industrial activity was also buttressed then by robust double-digit export growth and interest rates that were cooling off. These factors are not in favour now. Data suggests that the index fell 14 per cent below its earlier peak before regaining strength both in 2006 and 2008-09. A repeat of this cannot be ruled out for the following reasons:

Exports have just started slipping and may well continue down for some more time given the unfriendly policy environment; regulatory issues in key segments such as mining; coal shortages. These have a ripple effect on multiple manufacturing industries, ranging from metals, power and capital goods makers. The issues may not find a readymade solution. Indicators such as the HSBC Manufacturing Purchasing Managers' Index, which take into account new orders and inventory of items purchased, point to a dip in manufacturing activity in the near term. The index for eight core infrastructure industries, which accounts for a third of the IIP and is considered a signal for things to come in manufacturing, also remained stagnant. Exports also did an about-turn in 2011. After a spectacular double-digit growth rate for 24 months in a row until October, exports for November 2011 expanded by a mere 4 per cent over a year ago. Slowing exports have a far reaching impact than merely hurting export-oriented sectors such as chemicals, drugs and gems and jewelleries. Lower export widens the trade deficit of the country and is adverse for an already weak rupee as it results in lower dollar inflows.

Resilient services
But the services sector saved the day. It expanded 8.7-10 per cent in each of the three quarters in 2011 over their year-ago numbers. It buttressed economic growth with a 60 per cent contribution to the GDP. Finance, insurance, real-estate and business services were the forerunners even as trade, hotel, transport and communication too expanded, albeit at slackening pace, up to September this year. Lead indicators such as the HSBC Services PMI showed a bounce-back in November in contrast to more sluggish numbers in the earlier months. Export of services (RBI data) led by IT exports, too, improved in the September and October quarters when compared with the preceding quarters. But exports account for a little over 20 per cent of GDP, and cannot be expected to buttress growth. The rest of the domestic service economy, especially the banks and financial institutions, have to show robust growth for this sector to support the economy.

Price rise kills

Inflation was another big event in 2011. With aggressive monetary policy actions this year, headline inflation stopped short of kissing the 10 per cent-mark until August but touched double-digits in September. But lower food inflation in recent times has eased the pressure on the headline numbers. Non-food inflation, which is what matters for the manufacturing sector, remained stubbornly close to 8 per cent in October and November. For the 11 months of 2011, headline WPI rose 7.5 per cent, marginally lower than the yearago rise of 7.8 per cent. But is this level conducive for economic growth? According to a recent paper published by the RBI on Why persistent inflation impeded growth' a threshold inflation level of over 6 per cent can hurt growth. Beyond such a threshold, the inflationary expectations of consumers and producers turn much higher than actual inflation and curtail their spending and supplying patterns.

Other macro events in 2011 included the drastic 18 per cent fall in the rupee against the dollar. The currency is set to end the year as the worst performer in Asia. A weak rupee has a direct impact for companies on two counts: one, Indian companies on an aggregate are net importers. That means shelling out more rupees for their purchases. Two, Indian companies have outstanding loans and claims to international banks, 60 per cent of which are due within a year. They would have to pay more to settle the loans or refinance the same with high-cost local loans. Increase in repo rates from 6.25 per cent to 8.5 per cent, with an impact on lending rates, also means a sharp cut in the profitability of many companies other than the cash-rich IT, FMCG and public sector giants.

GDP cools off

All the above factors, as only to be expected, slowed GDP growth. From 8.3 per cent in the December 2010 quarter, GDP growth gradually dipped to 6.9 per cent in the September quarter. As discussed earlier, service sectors, to a large extent, made up for the drastic slowdown in manufacturing industries. Interestingly, private consumption, despite slowing, remained at a healthy 5.9 per cent for the September quarter. Aided by rural wage increases and higher salaries paid by corporate India, especially in the services sector, consumption remained resilient. Despite decent growth in agriculture, its 11 per cent contribution to the GDP did not provide much support to economic growth. The RBI, in its Macro Economic and Monetary Development quarterly report, holds a positive view on agriculture prospects for 2011-2012, with above normal southwest monsoon and equitable spatial distribution. This said, with a high base effect, this sector may find it difficult to outdo the bumper numbers of last year. The Survey of Professional Forecasters conducted by the RBI has, in fact, revised its agricultural growth expectations lower to 3.2 per cent for 2011-12.