Govt Faces Blistering Heat As the Indian economy teeters on the brink, IT stalwarts join UPA bashing

UPA's Summer Score: 0.1% Flat IIP Indicates Prostrate Economy Industrial output growth was at a standstill in April, confirming the gloomy prognosis of brokerages and rating agencies even as equities rallied on the expectation that the Reserve Bank of India (RBI) would cut rates aggressively on June 18 to revive economic growth, which fell to a nine-year low last quarter.  Output at factories, utilities and mines was stagnant, rising only 0.1% in April from a year ago after a 3.2% contraction in March, data released on Tuesday showed.  A Bloomberg poll had pegged the median estimate for rise in industrial output at 1.7%. The March data was revised marginally upward to -3.2% from -3.5%.  "I am disappointed. Industry has not yet picked up. Negative sentiments are there. We have to take steps to give positive signals," Finance Minister Pranab Mukherjee said after the data was released.  Most experts are now reasonably confident of a 25-basis-point reduction in interest rates in the midterm review of monetary policy, in order to revive investments that have stalled as erratic policies have eroded the confidence of investors. "Given limited room on the fiscal side to spur growth, the debate over upcoming monetary action has shifted from 'to cut or not' to 'cut by how much'. Our base case is that of the RBI easing by another 25 bps," Citi economist Rohini Malkani wrote in a note on Tuesday.  Banks are confident of at least a cut in the cash reserve ratio, the percentage of deposits they have to park with the Reserve Bank. "We expect the RBI to cut CRR by 1%... It will ease liquidity significantly and lower interest rates," State Bank of India (SBI) Chairman Pratip Chaudhuri told reporters on the sidelines of an event in Delhi. Consumer Goods Only Bright Spot  Mining output dropped 3.1% in April from a year ago, worsening from the 1.3% contraction in March, partly on account of a ban imposed by the Supreme Court and various state governments. Manufacturing, which has a 75.52% weight in the Index of Industrial Production, expanded 0.1% against a 4% contraction in March while electricity generation was up 4.6%. Ten out of 22 segments in the manufacturing sector contracted in April, marking a poor start to the new financial year.  Production of capital goods, an indicator of investment activity, contracted 16.3% in April, the second successive month of decline, because of sharply lower production of textiles machinery, cables and heat exchangers. Consumer goods provided the only silver lining. Production rose 5.2% with an almost equal contribution from its two components — 5% rise in durables and 5.4% in non-durables. Deutsche Bank now expects India's industrial GDP to expand only 3% in 2012-13 against 2.6% in the last financial year.  PRESSURE ON SUBBARAO  The immediate prognosis, analysts said, was dire. The troubles afflicting the euro zone, where there is a distinct possibility of a disorderly exit by Greece, could result in a macroeconomic shock greater than the collapse of Lehman Brothers in September 2008. The bleak global backdrop, combined with the sharp depreciation of the rupee, a near-stall in investments, weak external balances and repeated threats of downgrade by S&P's have only heightened pressure on the policymakers to act after India's GDP dropped to a nine-year low of 6.5% in 2011-12, triggering a raft of downgrades in growth estimates for 2012-13 to in the range of 6%. "Slowing GDP growth and political roadblocks to economic policymaking are just some of the factors pushing up the risk that India could lose its investmentgrade rating," S&P said on Monday, warning that India could be the first BRIC to lose its investment grade rating.  The burden of expectations has fallen on the RBI as the government is unlikely to venture into any reforms ahead of the presidential election in July, as indicated by the recent climbdown on the pension bill in the wake of opposition by the Trinamool Congress.  INFLATION DATA CRUCIAL  But rate cut expectations could change when inflation data for May is released on Thursday.  A sharp spike in food inflation could push up headline inflation for the second month running, from 7.23% in April, though core inflation, or inflation minus the volatile food and fuel components, is expected to drop.  Abheek Barua, chief economist at HDFC Bank, feels the RBI may choose to focus on core inflation more and cut rates even if headline inflation rises above 7.5% in May. "There are two reasons why the RBI could go in for a rate cut. First, they are increasingly taking into account the concerns on the growth front.  Second, they have communicated that they are trying to delink monetary policy from headline inflation," he said. Softer commodity prices and the decline in crude will also help ease inflationary pressure going ahead, some experts say. "We believe headline inflation, though still elevated, is not a major stumbling block to further RBI rate cuts," Barclays economist Siddhartha Sanyal wrote in a note.