An upsurge in manufacturing took cumulative industrial production from April-August to 10.6 compared to 8.7 last year and August saw a 9.7% rise compared to 7.6% but lower than July’s growth of 12.7% but analysts say that consumer demand has not slacked. Analyzing the data release by the Central Statistical
Organization, they attribute the slowdown from July to monsoon flooding and that
the hot consumer sentiment may yet bring about an interest rate hike in the next
review. Only a couple of days earlier, the
Reserve Bank of India (RBI) had stated only a few days ago that inflation is in check and liquidity is comfortable indicating that it may not raise rates in the immediate future. The RBI will review monetary policy on Oct 31 and has so far raised the benchmark short-term interest rate 3 times in 2006 taking the reverse repo rate to 6%. In response to these numbers, the Indian rupee edged up to 45.5950/6050 against the dollar from 45.60/61 and the yield on the 10-year Federal/Union bonds inched up briefly to 7.64% from 7.63%.
Manufacturing sector at an impressive rate of 11.1% compared to 8.5% last year. However, power generation and mining figures for August have once again disappointed showing a moderate growth of 3.7% (versus 7.9%) and a decline of .1% (versus -2.5%). While the decline in mining is lower this year than the same month last year, last year’s cumulative growth was 3.1% as against 1.6% cumulative growth this fiscal. Cumulative power generation from April-August fell slight to 5.7% versus 6.0% during the same period last year. These declines in power and mining have been offset by smart gains in consumer goods (durables and non-durable) and capital goods sector due impressive growth in incomes and increased exports to the West. Consumer durables showed the highest growth at 20.2% in August (13% last year) and capital goods grew marginally at 14.7% (14.6%). Consumer non-durables grew at 12.6%.
Other macro parameters also looked positively with a Ma Foi Management Consultants survey finding that job creation surpassing expectation with trends showing up to 1 million new jobs vastly exceeding target of 620,000. This 2.95% growth over last year will be mostly in the Information Technology (IT) and IT-enabled services (ITES), manufacturing, retail, and energy is however not so impressive when one considers that 8.6 million graduates enter the job market every year. Further, the banking, financial services, and insurance (BFSI) sectors may actually see a drop in recruitment and a reduction of 131,000 jobs because better opportunities exist in other sectors and abroad. The BFSI is growing but not creating more jobs and this aspect needs further study. Besides IT/ITES, construction, communication, transportation, retail, manufacturing, energy, and miscellaneous services show a positive employment trend while mining, reflective of its economic performance, remains negative.
While large Foreign Direct Investments especially in Telecom and IT is expected in the next three years, the Federal Government dismissed demands from its communist allies and some corporate bodies and reiterated the security risk implication of investments from China (and its territories Honk Kong and Macau ). For the first time, India has categorized China along with Pakistan and Bangladesh and will not grant automatic clearance even in innocuous consumer goods (FMCG). Along with China , India is also adding North Korea , Taiwan , and Afghanistan to this sensitive list. Additionally, the Government will expand the present list of sectors requiring extra security investigation (ports, aviation, telecom, and Internet services) to include investments pharmaceuticals, data processing, metallurgy, IT hardware, hydrocarbon exploration, pipelines, and refineries. The National Security Council (NSC) has also asked that directors, senior executives of foreign companies in these sectors should also be screened before allowing them to work in India . The Ministry of External Affairs (MEA) apparently is opposing the move to single out nations as it would affect relations with those countries.
Regardless of India ’s policy to screen investment from China , that nation posted its second largest ever trade surplus signaling that the Government has failed in cooling an investment boom. While the trade gap reduced from August’s USD 18.8 billion to USD 15.3 billion, this reduction was lower than expected and Premier Web Jiabo said that this soaring surplus was one of China ’s biggest economic “problems” as it strained relationships with the US and created a cash surplus that is close to USD 1 trillion. China hopes to close the gap by 2010 but without it appreciating its currency Yuan, as the US wants, it is impossible for it to achieve this target. The US pressurized China to drop the linking of its currency to the dollar July 2005 and China complied but has controlled the gains against the dollar to 2.4% vastly inconsistent to its economic growth and economic parameters. US lawmakers are already demanding sanctions on China for not allowing the Yuan to grow faster. The EU has already slapped import duties on Chinese shoes. While the Chinese Central Bank has raised interest rates, this unbridled investment boom will cause large scale production capacity creation leaving large idle production lines. Besides, such large surpluses will open up the Chinese economy to external shocks. Most importantly, as highlighted by the Asian Development Bank (ADB), a large US trade deficit and Chinese surplus will create a dollar collapse that will “play havoc” to the global economy.
Despite such external threats to the economy beyond its control, a study by the Chicago Council on Global Affairs found that Indians view their influence in the world and Asia as being higher than that of China . India also sees itself as gaining on the US in terms of influence and as an innovation leader.