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The truly biggest story of the year

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A series of bad decisions by the current government has left the economy in tatters. Runaway inflation has been tackled unimaginatively: by continuous raising of interest rates. The predicted result was drop in industrial production. But the sheer magnitude has caught everyone by surprise, reports ET:

India’s industrial output contracted 5.1 per cent in October from a year earlier, government data showed on Monday, much sharper than a median forecast in a Reuters poll for 0.5 per cent fall.

Manufacturing output, which constitutes about 76 per cent of the industrial production, fell an annual 6 per cent, the federal statistics office said in a statement.

India slashed its full-year growth forecast on Friday amid slowing domestic and global demand, with officials warning the government was facing a serious balance of trade problem and will have a tough time meeting its fiscal deficit target.

The economy grew 6.9 per cent in the quarter through September, its weakest pace in more than two years.

The Reserve Bank of India (RBI), which reviews policy on Friday, is expected to pause its tightening cycle because of slowing growth, after raising rates 13 times since early 2010 to control inflation that has stayed above 9 per cent for nearly a year.

Headline inflation likely eased in November to 9.04 per cent from 9.73 per cent the month before as food prices fell to their lowest in nearly three-and-a-half years, a Reuters poll showed. The data is due on Wednesday.

The government has been budgeting a deficit for years: debt servicing took away 29% of the union budget this year and 31% of the incoming were expected to be borrowings. This will certainly not be possible if the economy crashes and burns. Foreign investments are also going to get harder to tap with the retail FDI proposal running into political trouble and the balance of trade already negative. This lack of manoeuverability led to a sharp drop in value of the rupee, as IE reports:

Sending jitters across financial markets, the Indian rupee on Monday hit its lifetime low of 52.84/85 against the dollar as demand for the US currency soared in the wake of negative growth in industrial production in October.

The rupee is now set to fall below the 53 level in the coming days as some players are shorting the currency which could pull it down further.

Market experts say that because of the fiscal deficit concerns of the country and expected slowdown in growth rates, traders globally are shorting rupee as they are betting on it to hit 57 or 58 against the dollar.

The stock markets have been jittery since 2008, and this news brings no cheers, as a story in BS reports:

BSE Sensex

Having fallen by more than a fifth this year, Sensex among the worst performing indices globally.

A sharper-than-expected fall in the October industrial output compounded investor concerns, pulling the stock markets down to their two-week low on Monday. The Bombay Stock Exchange benchmark, Sensex, fell 343 points, or 2.1 per cent, to close at 15,870, its lowest closing since November 25. The broader S&P CNX Nifty fell 102 points, or 2.1 per cent, to close at 4,764. Indian shares have fallen more than a fifth this year and are among the worst performers globally.

According to provisional data, while foreign institutional investors sold stocks worth Rs 428 crore, domestic funds bought stocks worth Rs 166 crore.

There was greater pressure on banking stocks, which rose last week on expectations the Reserve Bank of India (RBI) would cut the cash reserve ratio.

A continuing economic slowdown at a time when all the major political parties are in disarray (the UPA government is embroiled in cases of corruption and the BJP has no clear leader) certainly will lead to ugly and unproductive politics. We saw this already in the case of admitting foreign investment in retail. But there could be worse; one of them is a return to the blood-drenched politics of the ’90s.

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Written by Arhopala Bazaloides

December 13, 2011 at 3:36 am

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