The decline in industrial output in October is yet another signal that we are facing a slowdown that can worsen further. The stimulus programmes announced so far may not be of much help, with the only saving grace being cheaper oil. By Shivshanker Verma

Until recently, we were all in denial that the Indian economy was slowing down. Just like we were in denial that terrorism is a grave threat to the very existence of this nation, until the Mumbai attacks. The now-former finance minister and even the prime minister kept insisting that India ws somehow immune to the global financial crisis and GDP growth this year will be no less than 8 to 8.5 per cent.

When economic data, like industrial growth, pointed otherwise, the reliability of the data itself was questioned. Economic research outfit CMIE, the most incurably optimistic of all forecasters, had the highest at stake in proving the current IIP data wrong. So the government conveniently entrusted the task of compiling data for a new IIP series to CMIE.

But, as CMIE compiles the supposedly more reliable data, the old IIP index continues to nosedive. During the month of October, industrial output actually shrank by 0.4 per cent. That is a first in nearly 15 years and the government has pre-empted further embarrassment by accepting that the trend may continue in November as well.

The RBI now says it will revise its GDP growth forecasts downward for the current year and the Planning Commission deputy chairman has gone on record that economic growth may slip to 7 per cent this year. It is sinking in only now, even if somewhat slowly in government circles, that the economy will see a substantial growth slowdown this year and next year will be even worse.

But in popular conscience we are already in a recession! On my way to work the other day, I counted three radio spots that mentioned recession, all within half an hour. There are many who believe that anyone who is even remotely associated with Dalal Street must be a pauper now. I even spotted an ad by a used car dealer which said, "more than 250 luxury cars dumped by Dalal Street brokers" !

Can it get any worse?
The news is not pretty. Exports declined in October and may do so in November as well. Despite the rupee plumbing the depths, the outlook for exports may not turn for the better until the global economy recovers. That seems to be quite a while away, as almost every developed economy is now officially in recession.

The same goes for service exports as IT budgets of major global corporations will remain very thin for at least a few years. The weak rupee may encourage overseas Indians to remit some of their savings now, but remittances out of current earnings will decline. Tourism earnings will take a double blow, from the global slowdown and the aftermath of the terrorist attacks.

On the domestic front, lower demand will lead to a marked slowdown in many sectors. Construction companies have postponed most new projects and some have stopped work on half-built projects as buyers are hard to find. This will lead to a big fall in construction growth, which was surprisingly high during the second quarter.

Though there is a rush among big builders to launch 'affordable home projects', it remains to be seen whether they will find enough buyers when the perception is that prices can decline further (See: DLF hits `affordable house' track with Rs15,000-crore plans). One of the major real estate service firms predicts another 25-30 per cent price decline in major metros next year as there is excess supply that will remain unabsorbed for a couple of years at least.  

Consumer goods index slipped 2.4 per cent in October and retailers are anticipating worse in the coming months. Walk into any retail store and the drop in optimism is palpable. Footfalls are down and stores are stocking less. In some stores, the store manager and other senior staff have disappeared and they are being managed entirely by counter clerks. Reliance Retail has frozen its store expansion plans for 6 months ostensibly for rents to drop, but more likely because demand is waning. Discount sales are galore and there are rumours of some super stores throwing in the towel.

Manufacturing output declined 1.2 per cent in October and that may be just the beginning. Car sales were down more than 20 per cent in November and white goods sales are not exactly sizzling. The demand slowdown in finished goods will now trickle backwards to primary and intermediate goods. Cement and metal prices are already well off their highs.

Capital goods output went up 3.1 per cent in October, but the growth rate is a far cry from the double digit expansion seen until recently. It is not very clear what is propping up capital goods production as capital investments are usually scaled back very early into a growth slowdown. Is it that some industry segments are sticking to their expansion plans, on hopes of a quick recovery or in anticipation of major government spending plans? We will have an answer over the next few months.

Whichever way we look at it, it is pretty evident that GDP growth during the second half of this financial year will be substantially lower than the 7.8 per cent recorded for the first half. For the next financial year, growth may be well below 6 per cent. That is if we are lucky enough to get a normal monsoon and a stable government.

Will the stimulus programmes help?
Among the stimulus plans announced by the government so far, the reduction in central sales tax may prove to be the most effective as it has already resulted in lower prices. Steps to boost property demand by lowering interest rates are unlikely to have a sudden impact as many potential buyers will be wary of taking big loans when job insecurity has increased and when prices are expected to decline even further. Besides, home loan rates have come down only for loans below Rs20 lakh.

There is not much supply in the lower priced segment and those who can afford to take a loan now are unlikely to settle for smaller homes just because they have become slightly cheaper.

The next obvious step was to cut fuel prices which the government has already done partly. There is some talk of adopting free pricing for petrol. This will bring down petrol price by another Rs10 per litre at current crude oil prices, but will reduce the surplus available to oil companies to subsidise diesel, LPG and kerosene. Hence, it is unlikely that the government will take this decision anytime soon.

On its part, the RBI has brought down interest rates substantially over the last few months. However, banks have not passed on these rate cuts fully to borrowers as they are hesitant to lend in a downturn. Despite the decline from over 12 per cent earlier this year to around 8 per cent now, inflation may remain a worry if food prices do not decline and the next crop falls short as some reports suggest. So, expect the RBI to cut rates by 1.5 to 2 percentage points before the middle of next year.

In a way, the government already had big ticket stimulus plans in place well before the slowdown happened. The rural jobs programme and the farm debt waiver were nothing but giant stimulus programs, probably the biggest this country has seen. If not for these programmes, it is possible that the economic data would have been worse now. On the other hand, huge spending in these programmes will restrict the government's ability to launch other large initiatives.

The only saving grace is the steep fall in oil and other commodity prices. Lower fuel prices will substantially cut the subsidy bill next year and the government can use the savings to step up spending in infrastructure and other areas. GDP growth will be higher by at least 2 per cent, just because of lower fuel prices without considering any additional government spending from savings in subsidy costs.

Buckle up, we are in for a rough ride for a while.