India’s IIP growth flatlined in April, piling pressure on policy makers to cut rates and revive the economic fortunes of the BRIC nation that S&P’s warned could be downgraded to junk status because of political inaction. The ratings agency said India’s leaders had strayed from the path of economic liberalization and the country could become the first so called BRIC nations-Brazil, Russia, India and China- to lose its investment grade credit rating. High inflation and interest rates, splits in the top leadership and the euro zone debt crisis have weighed on Asia’s third biggest economy for more than a year. Economic growth hit its weakest pace in nine years in the quarter ending in March. India needs to change and somehow policy makers need to respond but there are no signs of them doing so. Pounded by barrage of bad news business groups want the government to react so that the long promised measures are laid for encouragement of investment. The government has surprisingly found it difficult to even implement modest reforms. A public backlash against a recent petrol price hike forced it to temporarily shelve plans to cut costly diesel subsidies that could cease pressure on the budget deficit.
IIP data rose just 0.1% in April from a year earlier, lower than market forecast and Money Matters forecast of 1.7% and 1.2%. Followed by revised 3.2% fall in March which indicates clearly that industrial growth is extremely weak there is an aggressive need for monetary as well as fiscal support. Capital goods which include items such as factory machinery fell 16% in April from a year earlier. This key investment indicator has risen only once in the last eight months. Output in the mining sector another key economic driver fell 3.1% year on year. The release of inflation on Thursday is further indication of the interest rate decision. It is expected to have risen 7.6% y/y. S&P had downgraded the outlook on long term rating on India to negative from stable in April. The BBB minus rating is the lowest investment grade level. This agency accuses the ruling Congress to be very complacent in its approach towards economic growth and reforms towards the macro growth in the economy.
The economy’s lackluster growth along with Brazil’s woes has tarnished the BRIC nation’s reputation as drivers of growth in the global economy. It feels that the economic surge of BRIC’s has come to an halt and that India scored the lowest in the group on many measures of productivity. Its however evident that a rate cut without policy reform to reduce supply bottlenecks will add pressure to inflation and it would be pushed higher. Easing but lack of supply response will head nowhere and we would continue our fight in the vicious circle.