Weak factory output in India and declining Chinese trade are not good signs for the world economy

Economic data from the two fastest growing economies –China and India during the last week is not good for the crisis ridden world economy. In India, the monthly industrial production for December 2011 shows a declining growth trend. On the other, the Chinese trade data for January 2012 has shown both export and import contraction.

India’s factory output growth rate of meager 1.8% for December is uncharacteristic to the status of an emerging economy. The figure is more disappointing given that India is a domestic demand driven economy. Domestic production trends rather than trade figures are more important in driving growth rate in the Indian economy. Hence, a low factory output growth usually precedes a low economic growth in India.

The disappointing feature of industrial production trend for the country is the 16.5% contraction in investment goods (capital goods), indicating low level of investment. Understandably, this investment demand contraction is because of the negative business sentiment out of high interest rate existing in the economy. This indeed shows that the RBI should design a more responsible monetary policy aiming economic growth.

If India is driven by domestic production and consumption demand, Chinese economic performance is largely determined by trade. The Chinese trade data for January shows decline in both exports and imports. Exports fell by 0.5% and imports fell by a more severe 15.3%. The steep decline in Chinese imports is a set back to the thinking that Chinese consumption through high imports will compensate weakening Eurozone demand.

At the same time, declining exports for China indicate the crisis in the Erozone has started to produce contractionary effects on the world economy. China’s bilateral trade with European Union fell by more than 7% in January. Though the extended Chinese New Year celebration has been attributed as an immediate reason for the weak trade data, the coming months are important to verify the fundamental reasons for the present trend. The IMF has already made a prediction that Chinese economic growth may come down significantly due to the Euro zone crisis. 



Key words: Indian Economy, Indian economy and Chinese Economy, India Index of Industrial Production.