Weaker export numbers and PMI don't augur well
Though the marginally higher Q1 GDP growth may have given the impression to some that the economy had bottomed out, even if weakly, the latest exports data as well as the August Purchasing Managers Index (PMI) suggest the economy is not quite bottoming out—this is the poorest PMI in the last 9 months. Not surprisingly, while a Ficci business confidence survey talks of a ‘jobless degrowth’, Morgan Stanley has just cut its FY13 growth forecast to 5.1%. While CLSA has a higher forecast of 5.5%, the research note put out by its chief economist says GDP in the next two quarters is likely to remain in the 5-5.5% range, after which a favourable base effect will help.
With exports growth falling to minus 14.8% in July, this means April-July exports have fallen by 5.1% versus 8.8% rise in the three months ended December 2011 and 47.6% rise in the three months ended September 2011. The continuous fall in exports suggests that even the PMEAC’s reduced $334 billion target for FY13 may be difficult to achieve, much less the commerce ministry’s target of $360 billion. If Europe’s recession wasn’t bad enough, the higher chances of a US fiscal cliff will pose more problems for exporters—poor global growth, more than the depreciating rupee, is the main reason for the falling export growth. While poor exports have an obvious implication as far as industrial growth is concerned, the fact that non-oil imports fell 8.6% in July suggests domestic demand continues to be sluggish. If this isn’t bad enough, despite the import slowdown, the trade deficit is up to $15 billion. While the PMEAC has projected a current account deficit of $67.1 billion, even achieving this means exports will have to look up soon.
Though the government has tried to boost sentiment by the Shome panel recommending GAAR be deferred by 3 years and by the finance minister saying the Vodafone matter will be considered carefully, a lot more will be needed to convince investors the government means business, more so since the legislative agenda has clearly taken a backseat. Moving on limiting the diesel subsidy is the signal the market and the credit rating agencies are looking for.