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IIP for May 2015 At A Lousy 2.7%, April's Wow Growth Revised Downwards

The Index of Industrial Production (IIP) for May 2015 is lower at 2.7% compared to April.

Who am I kidding? This is just MISERABLE. This is the kind of number we should be kicking ourselves about. How can be we be in low single digits, or NEGATIVE, for the last THREE years?

This is either a stupid statistic, or we are simply not making things in any reasonable growth measure. There is something called “Make in India” and we are simply not doing it. Period. Okay, rant over.

Now for the visual thingies.


Even the comparatively awesome data in April (+4.05%) has been updated down to 3.36%, which is as good as abysmal. And then, you have the slowdown in manufacturing which forms the majority of IIP.


Finally, the use-based indexes:


(Click for larger image)

Nothing in there looks decent, except that consumer goods has gone to 0%. At least it’s not negative.

Our View: Blech.

  • B L Chandak says:

    Copy of A Wake-Up Call Letter sent to GoI, RBI, FICCI, CII, ASSOCHAM reg. acute liquidity & credit crises and slump in business activities
    Dear Sir,
    Trade Credit Induced Liquidity and Credit Crises & Business Slowdown : A Wake-Up Call
    Most humbly it is submitted that trade and industry in general [ except for a set of corporates/cash rich firms] are suffering from serious liquidity and credit crises. Both market liquidity and funding of liquidity are under squeeze. Wide-spread inter-firm payment delays/defaults, delays in payments by some Govt. Deptts., contraction in trade credit [TC] flows and decline in business activities are the central features of the present slowdown in trade and industry. Many firms’ working capital cycle is disrupted/lengthened which impacts their production, sales and earnings. It seems that a critical threshold of delays/defaults by trade debtors has been reached which has set-off a systemic illiquidity cascade through the financial system. Outcome of these is reflected in a prolonged and extraordinary loss in industrial growth momentum. As such, explaining sluggish industrial growth in terms of policy reform issues, interest rate policies, external factors, etc.; is not realistic. Despite a spate of policy reforms and administrative actions to promote investment and remove production hurdles and liberalization of foreign investment regime, growth uncertainty and growth concerns persist. Pronouncements relating to bottoming out of industrial slowdown/NPAs and appearance of green shoots and expectations of pick up in economy time and again have fizzled out over the last 3-4 years. Continued under-utilisation of capacity in various industries has very little to do with policy issues. These show misdiagnosis of industrial slowdown in terms of policy reform issues.
    Essentially, growth crisis is triggered by TC network vulnerabilities. Interactions with a cross section of trade and industry confirmed that market liquidity is fast drying up. Cash inflows in the market are meager or are not there. Business activities are down. Their assertion is corroborated by some leading goods transport associations who indicated that there is appreciable decline in volume of transport [a representative index of business activities]. They also indicated that payments in general are getting unusually delayed. Reportedly, domestic money transfer business of Angadias has appreciably dropped which corroborates the above fact. It is also learnt that market liquidity is also hurt by drastic reduction in volume of informal discounting of post-dated cheques by private finance firms. According to market sources, this is due to heightened fear/uncertainty about the honouring of cheques. Large investment in realty by businessmen and illiquid real estate market have aggravated the liquidity position in trade and industry.
    Importance of Trade Credit
    In terms of financial intermediation, credit volume/activities, reach, inclusiveness, credit redistribution and supply chain financing, role of TC network is truly stupendous. It forms the prime-base of working capital needs of commercial and industrial sectors. At macro-level, TC not only influences total volume of credit flowing to business sector but also funding of commercial and industrial transactions/activities and allocation of credit/liquidity across firms/sectors. Dynamism with which an economy is able to reallocate financial resources across firms is as important as macro financial flows. Efficient, adequate and timely redistribution of liquidity along the supply chain is dependent on length, depth and strength of liquidity chain. The strength of liquidity chain itself is dependent on the sequential TC creation by firms in the chain. Role of TC as last mile links in credit creation and its distribution is very crucial. Intensity/pattern of intermediation of bank credit, private savings and suppliers’ credit by firms through TC determine volume of credit supply, level of demand for bank credit, credit multiplier and market liquidity. These affect saving-investment-growth nexus. Further, the depth and efficiency of financial system influences a country’s capacity to absorb external capital inflows and benefit from spill-overs emanating from foreign investment.
    Trade Credit and Economic & Financial Crises
    It is beyond the imagination of many that weaknesses in TC network can amplify and propagate liquidity shocks through interconnected financial system. Further, given its informal nature, lack of structured data and limited analytics on TC, academia/policy makers seem to be not fully aware of the predominant role of TC in the financial system and negative network effects on business arising from adverse developments in TC. The present crisis is essentially triggered by trust-deficit-induced systemic weaknesses in the financial intermediation and credit reallocation role of TC. This has some semblance in the Great Depression of 1930s wherein disruptions in credit intermediation and its allocation process, banks’ failure/inability to make sufficient volume of loans, banks’ shifting of funds from businesses to holding of safe and liquid investment, inefficient credit allocation, high debtor insolvency, etc., had made the depression severe and long-drawn.
    Credit Culture Vulnerabilities
    Weakening/undermining of discipline in TC practices/conventions and reliability of counterparty, changes in credit culture from one of ethically committed to honour debt commitments to growing possibility/fear of opportunistic behaviour by trade debtors in delaying/defaulting payments and social/business community’s indifferent attitude to debt delays/defaults/bankruptcy in the recent years inexorably impact transactional trust and confidence in TC flows. This flawed credit culture environment continuously have a dampening effect on TC operations. Very little new TC is created due to low perceived creditworthiness of start-ups, new and young enterprises and fear of opportunistic play by a trade debtor. Even existing TC relations based on sunk TC rotation [ fresh supply on credit is made after receipt of payment of earlier credit] is getting reduced due to payment defaults/delays. These result in credit deleveraging. Further, larger liquidity holdback by businesses, weary credit funding conditions and imbalanced credit flows across firms/sectors impact circular flow of TC stream. When credit cannot circulate freely, it impacts business activities. Further, if liquidity is not channelized by large corporates to SMEs through TC channel because of reliability concerns, liquidity stays on their balance sheets [large cash & bank balances] instead of flowing to credit-deficient firms. Even, World Bank has advocated TC as an important and efficient conduit for channelizing credit from big businesses to SMEs. However, due to low reliability in TC, corporates follow cash-sales-and-credit-purchase policy. This aggravates credit crunch for MSMEs. Further, bank credit/ factoring against receivables is scanty due to perceived collateral value of receivables being uncertain/ unreliable. However, globally, receivables are the major collaterals to get working capital from banks/factors.
    Spill-Over Effects of Systemic Changes in TC
     Systemic weaknesses in TC interacting with financial and real sectors can create perverse incentives/opportunities resulting in skewed distribution of resources across firms/sectors. It can undermine productive investment. RBI’s annual study of corporate financials shows that annual average ratios of gross fixed assets to total assets declined from 67 % in 1990s to 59 % in 2000s while financial assets to total assets increased from 12% to 22% over the same period. RBI’s Financial Stability Reports Dec. 2013/June 2014 with study of 765 companies’ financials over 2000-12 corroborate the above findings. Anecdotally, it finds the top 10 companies’ treasury profit was larger than that of top 10 banks in FY 2013. As such, lower capex by corporates impacts output, capacity, productivity, trade competitiveness and future growth potential of the industry.
     Any loss of confidence in credit based payment system would result in more cash-based and lesser credit-based transactions, thereby reducing efficiency in payment mechanism, economic activities and flow of transactions.
     Delayed payments impact cash-flows; the lifeblood of any business. In times of business slowdown, it leads to rapid depletion of working capital. It reduces TC velocity which impacts credit circulation along the supply chain. Heightened counterparty risk and customers delaying payments to vendors create a situation wherein many players are reluctant to release cash and extend credit. These exacerbate both, funding liquidity and market liquidity crises. Steady increase in liquidity holding is a reflection of the decline in income velocity of money during 2000s as compared to 1990s despite rapid progress in core banking and e-payment system in the recent years.
     Dysfunctional TC has bearing on banks’ excess holding of SLR, banks’ push to big-ticket loans/retail credit vs. restrained production/ capex/ MSME loans. Strong preference for cash sales leads to inordinately high cash-discount which makes trading/import more profitable than undertaking production/capex.
     Demand for bank credit depends on TC growth and bank credit risk is interlinked to TC risk. These impact bank credit growth.
     More than the direct impact of circulatory credit slowdown on economic activities, the invisible economic cost of growing trust gap in TC is very high in terms of business deal not effected, goods not produced, investment not undertaken, firms not started as businesses anticipate in advance that they cannot fully rely on commitments of a trade debtor/counterparty.
     Weak inter-firm relations/ trust hinder the value chain; competitiveness by strangling investment, create technical and cost inefficiencies and limit the breadth and depth of commercial relationships.
    Effects of the dysfunctional TC system is manifested in dismal manufacturing growth [annual average growth of about 1.4% over the last 4 years ending March 2015 vis-à-vis 12-14% envisaged under New Manufacturing Policy], steady decline in share of manufacturing in export from 80% in FY 2000 to about 60% in the recent years, meltdown of India Growth Story, decline in potential growth rate, steady increase in NPAs, high trade deficit, mismatch in demand and supply of credit, rising unemployment, etc.
    Trade and industry find the TC-based explanation of the growth-crisis convincing, practical and real. Trade credit literature and empirical studies across the world strengthen and validate the findings. In an interconnected financial world, if the subprime mortgage market with less than 5% share in total US mortgage market could trigger global economic crisis, then it is quite logical that systemic weaknesses in the all-important TC system has set off deep, widespread and enduring economic slowdown.
    It is clear that the impact of dysfunctional TC in terms of changes in funding liquidity conditions, credit composition, liquidity distribution and pattern of investment are of systemic proportion. As such, greater understanding of the TC network, its working and the manifestations of its behavior under uncertainty, level of confidence and trust in TC network and liquidity stress become important towards diagnosing the growth impacting factors.
    Trade finance intervention is required to overcome the serious liquidity crisis. Policy framework should promote TC’s role in widening and deepening of circulatory credit stream and its role as the lender of last resort for unbanked firms. There is an urgent need to strengthen working of the TC network. This calls for measures like maintaining/strengthening integrity/discipline and engendering transactional trust in TC eco-system. Other measures include : putting in practice self-regulation, code of conduct and efficient arbitration system by industry associations, collective action by them against willful defaults/ opportunistic behavior, creation of credit directories for recording private credit history, strengthening of creditors’ right and putting in-place a cost-effective and timely legal recovery mechanism. In this connection, a paper outlining roadmap for strengthening TC eco-system is also enclosed for your kind perusal.
    It is felt that trade and industry are fast approaching serious crisis of erosion in their vitality and base. This needs to be realized fast and remedial measures taken thereof. Many businesses feels that it is a wake-up call to take urgent remedial actions. Without addressing the TC problem, the industrial growth and NPA scenario may even deteriorate further. “Make in India” strategy may not achieve its potential. History will not be kind if we ignore these facts. Besides Govt./RBI, Industry Associations need to play a pioneering role in these matters. It is surprising that many of us are not seriously aware of the critical liquidity crisis facing a large number of businesses. A quick feedback from trade and industry can reveal the worsening of ground realities.
    With warm regards
    [B L Chandak]

  • Ramki says:

    One Word to describe the Problem – DEFLATION
    Three words to describe a possible solution – Lower Interest Rates

    • This has nothing to do with prices. It’s actual production. No of units, no of tonnes of steel etc.

    • umar says:

      i am not buying anything.
      not because i am waiting for it to get cheaper.
      not because I am waiting for a loan with a lower interest rate.
      I am not buying because i do not see my salary increasing.
      I am not buying because I am having to make a choice between life’s necessities and luxuries.
      It does not make any difference to me, if a flat of 1 Crore is cheaper by a few lakhs. that is not the market i am in at all.
      I am not buying because I am poor, and unwilling to take a loan, because I see no way of repaying that loan in future.
      I am not buying because I see most bigwigs are getting away with huge scams, without any problem.
      I am not buying because I have temporarily lost faith in the system, and its fairness towards me.

  • Dr R K Gupta says:

    Indian businessmen are a bunch of cheats, tax thieves and profiteering guys. They have very low professionalism and ethiucs. Not taht every ibne is like that. many are good too,
    Most Baniyas are getting labelled goods from CHina or other places and taking hefty margins sitting doing nothing. I am surprised from where this 2.2% growth is coming . It should be minus.
    Modi is a big bluff master and keeps changing stands and has habit to create drama with lacy talks to show work. He should first study why people are getting Chinese stuff?
    Agro growth is low and baniyas and babus are gobbling up farm land which is just 1200 sq yd per person. can you imagine 1200 sq yd only? it means 50% population is going hungry.There are hard facts no one can challenge are of India and fertile land and our 125 crores population.People are getting poorer as CEOs of some companies and banks are getting fatter with multi million( double or triple digit millions) salaries packs. No doubt Indian is getting outcompeted due to costs. See TCS and Infy?

  • Kaushik says:

    Umar, you spoke my heart out and this quarter you have attained the majority.