Indian economic indicators painted two different stories in data released on Thursday. PMI was down, but only fractionally, and still comfortably in positive territory. The trade deficit widened, however, and remains a worry.

It leaves the Reserve Bank of India with little room for manoeuvre.

The good news: Indian manufacturing fell only slightly during February, encouraging considering India’s disappointing 6.1 per cent GDP growth rate in the quarter ending in December.

According to PMI figures released by HSBC and Markit, the index was at 56.6, down from 57.5 in January, but higher than December’s 54.2 and November’s 51.0, and well above the 50 benchmark that separates growth from contraction. The figure was propped up by domestic demand.

The bad news: India’s trade gap widened further in January on the back of high gold and oil imports, according to data released by the ministry of commerce and industry, to $14.8bn from $10.3bn in January 2011. The trade gap stands at $148.7bn since the beginning of the current fiscal year, in April, from $105.9bn during the same period last year.

Economists said that February’s PMI data highlighted some of the inflationary pressures that remain within the economy, while January’s trade data raised further red flags about India’s widening deficit, and the country’s inability to turn the crucial indicator around.

Glenn Levine, senior economist at Moody’s Analytics wrote:

This is an enormous imbalance that appears unlikely to turn around any time soon. India is still growing at 6% while much of the world is near recession. But it’s far from clear how long these gaping shortfalls can persist. Imports might soon be double the size of exports, an absurd outcome that would inevitably require a correction, probably in the form of a sharply lower currency. A currency correction is not in our baseline forecast, but is a risk that needs watching.

Anubhuti Sahay, economist at Standard Chartered, said the main drivers of the trade deficit were gold and oil imports, commodities whose prices have spiked recently.

“Indians are huge gold consumers…it remains a big cause of worry for the trade deficit,” she said. “Oil imports have [also] been significantly higher – the impact is significant because oil prices have jumped up [recently], especially in the month of January.”

In January, oil imports rose to $12.3bn, 26.8 per cent higher than the $9.7bn in oil imports during the same month last year. For the fiscal year so far, oil imports have grown to $117.9bn, up 38.8 per cent from $84.9bn during the same period last year.

As beyondbrics reported last year, India’s penchant for gold is wreaking havoc on the country’s current account deficit as well, and Sahay – despite reports that India’s gold demand will weaken this year – said that may well continue because Indians are more and more likely to invest in gold “given the high inflationary environment”.

Inflation fell to 6.55 per cent in January, a 26-month low, and HSBC noted that input price inflation fell to 60.6 in February, down from 63.4 in January, but that inflationary pressures remain.

This from Leif Eskesen, India economist for HSBC:

After yesterday’s Q4 GDP shocker, today’s PMI number was more encouraging. Output growth eased in February, but remained above trend and rising domestic orders suggests that it should remain well-supported in coming months absent a further worsening of global economic conditions.

However, it remains a concern that capacity still appears strained as evident from lengthier delivery timelines and rising backlogs of work. This is likely testament to the inadequate implementation of key supply side reforms in recent years, which has left the supply side of the economy struggling to keep up with the demand side. In turn, this also explains why inflation pressures continue to simmer despite the slowdown in growth during the second half of last calendar year.

Which means India is unlikely to see a cut in interest rates – which have been hiked 13 times since 2010, and taken the brunt of the blame for the country’s low growth and dismal 2011 – any sooner than April, although a cut in the cash reserve ratio it imposes on banks is expected at the RBI’s next meeting in March.

Related reading:
India’s gold: the taxman’s take
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Guest post: India should be wary of Europe trade negotiations
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India’s widening trade deficit
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