TThere are telltale signs of a slowdown in the current fiscal, which we had first captured in an editorial two months ago. Thus, the growth in industrial production (IIP) slipped from 11.3 per cent in April to 7.1 per cent by July. The cumulative rise at 9.6 per was also lower than 11.1 per cent in April-July 2006. Manufacturing turned out the worst performance with its annual growth rate plummeting to 7.2 per cent in July, half the 12.4 per cent in April. Consumer durables declined marginally and transport equipment (particularly two-wheeler segment) stagnated in the first four months. The six infrastructure industries too expanded 1.7 percentage points lower at 6.6 per cent during April-August, notwithstanding some improvement in the last month.
Bank credit, which showed decline till July 20, has since turned positive, but the Rs 549 billion rise till September 14 was only around half of the Rs 1 + trillion increase in this period a year ago. Exports in rupee terms (which are not affected by dollar depreciation) rose only 6 per cent in April-August - one-sixth the pace a year ago, and import growth too came down from 22 per cent to 17 per cent. New project announcements, captured by ProjectsToday, have maintained their pace in the first half, but mega projects show a perceptible fall. However, Central government finance data shows 34 per cent rise in Plan account disbursements.
The WPI-based inflation declined to a record low of 3.23 per cent by mid-September, which was also largely due to food and non-food article prices which showed 7 per cent rise. Manufactured product prices escalated 4 per cent and projects outlays, as measured by ERIL Index of Cost of Project Inputs, only 5 per cent.
Overall, the economy expanded 9.3 per cent during Q1 of 2007-08, easing from 9.6 per cent a year ago.
Rupee depreciation, which has adversely affected exports and the industries that cater to exports, and around 300 basis points hike in interest rates are mainly held to be responsible for the retard. While the adverse impact of rupee appreciation is sought to be made good by export sops, the finance minister wants banks to lower lending charges.
Incidentally, a major factor that is having profound impact on liquidity, financial stability and inflation/inflation expectations, is dollar deluge. Here, RBI is facing a daunting challenge of a judicious mix of dollar buying to limit rupee appreciation on the one hand and containing the impact of dollar mop-ups on domestic liquidity, on the other. With the financial system already awash with liquidity, there is at present already very little likelihood of interest rates going up. In fact, high deposit rates (offered in the last quarter of the preceding fiscal) are what appear to be coming in the way of lower lending rates.

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