Markets and macro diverge
The stronger than expected industrial growth in April predictably failed to impress the markets, which again tanked on Monday. IIP data released on Monday showed overall industrial growth of 9.5% while manufacturing output rose an impressive 10.4%. These figures gel with the robust sales numbers for cellular phones, automobiles, two-wheelers and cement in April and May. They also come on top of 9% plus GDP growth in the March quarter. But all this is unlikely to have an immediate impact on the markets, which have been spooked by the worldwide flight of money from asset classes perceived to be riskier — such as emerging markets and commodities — to safer ones such as bonds. Also, in India markets are far more focused on quarterly results than on industrial production data.
Two sectors, mining and electricity, continue to slow down industrial growth. The government should denationalise coal mining, and liberalise licensing procedures for mining other minerals. This must be accompanied by a generous rehabilitation policy for those displaced by mining projects, as well as training to ensure that local people can be employed in the new mines and factories. It’s clear that in the face of local opposition India’s mineral resources will remain unused. Populism has ensured that electricity continues to be an even more intractable problem. State governments must compensate SEBs for subsidies, to make investments viable. Going ahead, future macro performance will largely be determined by the impact of rising interest rates on both consumption and investment. India’s 8% plus GDP growth has been, to a surprising extent, driven by consumption, which in turn has been spurred by interest rates kept low by a flood of liquidity. Spending on infrastructure, as a percentage of GDP, was just 3.5% in 2003, a 33-year low according to Morgan Stanley, and has barely budged since. That must change. With FII flows in reverse, India must find more stable forms of foreign capital. It must immediately scrap restrictions on FDI. That apart, infrastructure spending needs to go up to maintain 8% growth.
-- The Economic Times Editorial
Two sectors, mining and electricity, continue to slow down industrial growth. The government should denationalise coal mining, and liberalise licensing procedures for mining other minerals. This must be accompanied by a generous rehabilitation policy for those displaced by mining projects, as well as training to ensure that local people can be employed in the new mines and factories. It’s clear that in the face of local opposition India’s mineral resources will remain unused. Populism has ensured that electricity continues to be an even more intractable problem. State governments must compensate SEBs for subsidies, to make investments viable. Going ahead, future macro performance will largely be determined by the impact of rising interest rates on both consumption and investment. India’s 8% plus GDP growth has been, to a surprising extent, driven by consumption, which in turn has been spurred by interest rates kept low by a flood of liquidity. Spending on infrastructure, as a percentage of GDP, was just 3.5% in 2003, a 33-year low according to Morgan Stanley, and has barely budged since. That must change. With FII flows in reverse, India must find more stable forms of foreign capital. It must immediately scrap restrictions on FDI. That apart, infrastructure spending needs to go up to maintain 8% growth.
-- The Economic Times Editorial
posted by Loco at Thursday, June 15, 2006
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