2011 - macro trends

8/3/2019 2011 - Macro Trends

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2011 — When macro events ruled marketsVIDYA BALA

A round-up on how some of the key macro indicators moved this year seems to be in order toget a sense of what they signal for Corporate India.

News of FII investments or big-ticket investors' entry and exit from stocks no longer excitesthe 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 toget 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 adecent 7 per cent average run rate (over respective year-ago numbers) every month untilJune.

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 andOctober 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 goodsnumbers (with slump coming in later) and growth in mining work supporting productionactivity in 2008.

Both these segments show a decline now.

Industrial activity was also buttressed then by robust double-digit export growth and interestrates 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:

8/3/2019 2011 - Macro Trends


Exports have just started slipping and may well continue down for some more time given theunfriendly policy environment; regulatory issues in key segments such as mining; coalshortages.

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 intoaccount new orders and inventory of items purchased, point to a dip in manufacturing activityin the near term.

The index for eight core infrastructure industries, which accounts for a third of the IIP and isconsidered 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 24months in a row until October, exports for November 2011 expanded by a mere 4 per centover a year ago.

Slowing exports have a far reaching impact than merely hurting export-oriented sectors suchas chemicals, drugs and gems and jewelleries. Lower export widens the trade deficit of thecountry 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 quartersin 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 byIT 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 buttressgrowth.

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 toucheddouble-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 stubbornlyclose 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 year-ago rise of 7.8 per cent.

But is this level conducive for economic growth? According to a recent paper published bythe 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 muchhigher than actual inflation and curtail their spending and supplying patterns.

8/3/2019 2011 - Macro Trends


2011 - macro trends

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