in July and South Korea, home to major car makers, computer chip and flat-screen producers, recorded its sharpest export fall in July in nearly three years. The US too is widely seen as struggling to keep its pace of growth. The minutes from the US Central Bank’s latest meeting suggested that the U.S. Federal Reserve is likely to deliver another round of monetary stimulus “fairly soon” unless the economy improves considerably. The central banks in the developed world have slashed interest rates to near zero and injected trillions of dollars into the money supply in their efforts to support growth. The six consecutive quarters of slowing Chinese growth have also taken a toll on commodities markets, with falling prices and an uncertain outlook prompting miner BHP Billiton to shelve a US$ 20 billion expansion project in Australia. India’s domestic macro picture is also not very encouraging. The country has recorded the lowest growth rate in 201112 (FY 12) at 6.5% - lower than even the growth rate in the year of global crisis. The country has been seeing consistently falling growth rates since the fourth quarter of FY 11. Cumulative industrial growth has been in the negative zone (at -0.1%) during Apr-June, 2012. Investment sentiment has remained weak for the last 18 to 20 months. In just a year’s time, the growth in the credit of commercial banks (in terms of fortnightly averages) has decelerated from 21.4% in AprJun, 2011 to 17.7% in Apr-Jun, 2012. The output of domestic capital goods has been posting negative growth since June, 2011 and machinery imports’ growth has turned negative since May, 2012. Corporate profits have declined significantly since Oct-Dec, FY 11. The rates of savings and investment that had fallen sharply during the global crisis have not recovered to pre-crisis levels. In fact the latest data release by the RBI
shows that the household sector’s financial savings rate in FY12 (at 7.8% of GDP) is the lowest since 1989-90. According to the CMIE, there has been a sharp increase in capex projects that have either been cancelled or put on hold and such projects amounted to Rs 5 trillion or 6.0% of GDP during FY12. In terms of sectors, maximum weakness is seen today in infrastructure (esp. power and roads), steel and textile sectors. The investment climate is vitiated due to indecisive coalition politics, delays in the implementation of some important structural reforms and high profile corruption scandals. Specific reforms that have been delayed are the passage of the land acquisition bill and a mining policy that will enable the entry of private players into the system. The headline inflation (measured in terms of WPI) has been stuck above 7.0% since January, 2012 but the retail inflation (measured in terms of CPI) has been closer to double-digit level since April, 2012. If one looks at the data closely, CPIbased inflation has stayed above 5.0% (i.e., the RBI’s comfort level) since April, 2006. Persistent inflation has kept the monetary policy tight and interest rates elevated. While the consumer demand conditions have also started worsening, large national deficits around 9.0%-10.0% of GDP during the last four years and the current account deficit at 4.0% of GDP in FY 12 do suggest an overhang of demand despite persistence of inflation. The downside risks to growth and upside risks to inflation have further been aggravated by the weak monsoon this year. The monsoon deficit of the entire season till August 22 is quite high at 14.0% of the long-period average. According to reports, the monsoon deficit is affecting western oilseeds and cotton growing areas of the country. Even cereal and pulses production is under threat this year. These stresses certainly weigh on the Indian banking sector. A combination of slowing growth and higher interest rates means banks will have to struggle to grow business and asset quality concerns will be aggravated. Stagnation on the structural reforms front would worsen the asset quality of banks vis a vis large corporates, infrastructure projects, etc., while the stresses in agriculture and external environment would increase delinquencies in farm and small scale loans. Slowing revenues and higher provisioning burden on account
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