Economy Review: November 2008

Industrial production as measured by index of industrial production (IIP) improved slightly to 4.8 per cent in September, from the 10-year low of 1.4 per cent in the preceding month. However, going by lower excise and customs duty collections and drop in exports, the pace is quite likely to falter in October, the month that saw the domestic finances deeply impacted by the global turmoil. What is also worrying is that Manufacturing is paling and doing no better than Mining and Electricity, the two basic infrastructures that make it happen. Mining increased by 5.7 per cent in September and 3.8 per cent cumulatively. Coal production was up by 7.9 per cent in H1, while domestic crude oil continued to sag.

Erratic capital goods
Powered by 16+ per cent increase in Electrical & Non-electrical Machinery and Transport equipment, Capital Goods sector posted 19 per cent mount in September; but the 10 per cent average growth in H1 although relatively decent, was only one half of that a year ago. The growth could turn out to be a little lower given that first and final revisions in IIP for the sector have seen lesser increases in August and June. Here, we may note that the average monthly pace had recovered to 13 per cent in Q2, from a slide in the rate from 21 per cent in Q3 to 12 per cent in Q4 of the preceding fiscal and further to 8 per cent in Q1 of the current fiscal. Project investment could have slowed, but it does not seem to have nose-dived as is widely feared. The WPI of machinery escalated 5.1 per cent till 01 November, against 3.3 per cent a year ago. By the way, the average monthly rise of around 9.8 per cent in machinery production index in H1 has matched that of H2 of the preceding fiscal, though it was lower than 11+ per cent in H1 of 2007-08. Transport equipment performed much better, than in H1 and H2 of the preceding fiscal. Among the other 2-digit sub-groups, Cotton Textiles and Rubber, Plastic, Petroleum and Coal products declined in H1. Textile products (including wearing apparel) grew by 3.8 per cent, basic chemicals and chemical products by 6.1 per cent and petroleum refinery output by 4.5 per cent. Cement production did better in September by improving 7.9 per cent, but a steep decay in August pulled down the cumulative growth to 6 per cent (8.7 per cent). Finished steel (carbon) was also subdued compared to its year ago feat; production expanded at 5.3 per cent, as against 7.7 per cent a year ago. While Cement fared slightly better in Q2, compared to Q1, Finished Steel production grew less in Q2 (partly due to high year-ago feat). Incidentally, indicative of persistent consumption demand, consumer goods production was up by 7.7 per cent in H1, bettering the year-ago feat of 5.6 per cent and this was shared by both durable and non-durable goods.

Money supply
The Y-o-Y growth in M3 worked out to 19.9 per cent by 24 October, lower than 22.8 per cent, a year ago.

Bank deposits & credit
Aggregate deposits with SCB were up by 10 per cent till 31 October, slowing from 11.5 per cent in the first seven months of 2007-08. But credit increased by 12.3 per cent, almost twice of 6.8 per cent a year ago. Credit-deposit ratio worked out to 75.43 per cent. Food credit was up by Rs.7,074 crore (decline of Rs.9,800 crore). SLR investment increased by 3.5 per cent - one-fifth of the pace a year ago. Reflecting steep decline in CRR, bank balances with RBI expanded Rs.8,651 crore till 31 October in the current fiscal, around one-fifth of Rs.46,887 crore in this period a year ago.

Interest rates
Overnight inter-bank call money rates ranged 5.14-17.54 per cent in the first 19 days of November, as against 5.57-17.89 per cent in October of the current fiscal. The Reverse Repo Rate was at 6 per cent and the Repo Rate brought down from 9 per cent to 7.5 per cent. The cut-off yields on 91-days and 182-days T-bills were at 7.35 per cent and 7.21 per cent at the auction on 12 November 2008. Discount rates on Commercial Papers (CP) ranged 11.55-16.90 per cent on CP issued in the second fortnight of October 2008, as against 11.90-17.75 per cent in the first half. Yields to Maturity (YTM) on longer-term Government of India securities were at 7.60-9.59 per cent in the week ended 14 November. Prime lending rates of major banks ranged 13.75-14 per cent in the week ended 07 November. Deposit rates were at around 8.75-10.5 per cent. Cash Reserve Ratio (CRR) was pared from 9 per cent to 6 per cent.