Emerging Economy February 2009 - Indicus Analytics

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Highlights
• Monetary policy and fiscal policy on hold, vote on account to give a boost
• Pressure to cut interest rates further but RBI not showing much interest
• Rate cuts by RBI, if at all, only by March
• Manufacturing shows some recovery but likely to be a short term blip
• Agri output likely to be hit by warm temperatures
• Downturn hits hiring intentions, reverse migration hits villages
• Exports head for further decline as foreign markets shrink
• Firms look to domestic rural markets for growth
Last month we wrote, it is time to get over our collective pessimism, and get on with the job. Companies like Hero Honda who have gone in for rural markets have outshone others who are still stuck on servicing consumers who need loans. Auto sector cleared five months inventory in December and continued to do well in January primarily due to price cuts and discounts. Telecom continues to add more than 10 million consumers on the network.

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Emerging Economy February 2009 - Indicus Analytics

  1. 1. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 7th February 2009 Highlights • Monetary policy and fiscal policy on hold, vote on account to give a boost • Pressure to cut interest rates further but RBI not showing much interest • Rate cuts by RBI, if at all, only by March • Manufacturing shows some recovery but likely to be a short term blip • Agri output likely to be hit by warm temperatures • Downturn hits hiring intentions, reverse migration hits villages • Exports head for further decline as foreign markets shrink • Firms look to domestic rural markets for growth India: Kal, aaj aur kal Last month we wrote, it is time to get over our collective pessimism, and get on with the job. Companies like Hero Honda who have gone in for rural markets have outshone others who are still stuck on servicing consumers who need
  2. 2. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx loans. Auto sector cleared five months inventory in December and continued to do well in January primarily due to price cuts and discounts. Telecom continues to add more than 10 million consumers on the network. In times of slowdown, companies need to cut prices and focus on areas where the demand is. International demand growth will be lacklustre at best and likely to be negative. The slowdown will get worse if firms do not respond – and that is where the uncertainty in forecasting comes from. Despite large uncleared inventories, and missing buyers, the real-estate sector has not really reduced its prices (minor 5 to 10% cuts from astronomical peaks of the past will not do). At the same time it is reeling under a severe credit crunch. This crunch is then being transferred in many different ways to the upstream manufacturing and service sector suppliers. Merely easing liquidity will have little impact on the real- estate/construction sectors. Yes, it is better to take a hit and move-on rather than make a profit on every single sale. If prices do not respond to changing conditions, markets are not working properly, one way or another the government will need to step in. If the government responds as most corporate sector economists want it to – increase expenditures and reduce interest rates – sure we may go back to high growth for a while. But that would be a very short term solution. This downturn is a signal to (generally large) firms, that all is not well with their decision-making and growth strategies.
  3. 3. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Whatever the government does, it should not distort this critical signal. The vote-on-account is due on the 16th of Februrary 2009. It is expected that further tax breaks will be given. If the past is any indication, these breaks will be very sector specific. Construction, IT sector, automobile, chemicals, textiles, financial, etc. These sector specific stimuli have to be thrown in the trash can. If tax breaks have to be given, give it to everyone. Reduce service tax for everyone, reduce income tax, reduce VAT. But do not give sector specific advantages as they are highly distortionary. Yet the news is not all bad. The ABN-AMRO PMI survey (which we find a better indicator than the government’s own IIP index) has shown a small rebound in prodution worldwide in January. More interestingly, Indian manufacturing has been the least hit out of all countries surveyed. For the year ahead, the RBI survey of professional forecasters shows a wide range – minimum of 3.9% and a maximum of 8%. While our forecasts are more in the 7% growth zone for the year ahead, the 4% forecast is very much in the domain of the possible. A drought, or sudden shocks from the western financial world, or bad news from India’s own unorganized sector could take it down. Sumita Kale and Laveesh Bhandari 7th February 2009, Indicus Analytics
  4. 4. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can be contacted at sumita@indicus.net and laveesh@indicus.net. Economic Growth • IIP for November showed a 2.4% growth over the last year, in line with the Indicus forecast of 2.9%. Manufacturing grew by 2.4%, mining by merely 0.5% and electricity by 3.1%. • Electricity however performed worse in January, generating only 1.38% more power than the previous year. • In December, infrastructure sectors grew by 2.3%, compared to the 3.2% clocked in previous year. Coal and cement were the star performers at 9.4% and 11.6% growth respectively. • While cement exports declined, despatches for December grew by 12.11%. • The auto sector has seen a fresh spurt, with sales in December zooming to clear five months of inventory. Retail sales crossed 1.4 lakh vehicles, beating the previous record of 1.31 lakh in November 2007. • January also saw good sales, when Maruti reported its highest sales ever of 71,779 units, previous highest of 71,772 in March 2007 – focus on rural sector has seen the boost for Honda and Maruti, other auto majors have not been so fortunate.
  5. 5. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • ABN-AMRO PMI survey of 500 firms showed that there was a slight rise in the index for January, though the results still showed a contraction. • India incidentally has seen the least contraction in the PMI across all the countries surveyed by ABN- AMRO. See reference below. • 10.81 million wireless subscribers added to the telecom market in December, compared to 10.35 million in November 08 and 8.17 million in December 2007. Telecom density now 33.23%. • Railway freight revenue has been slowing down – 13.39% growth in April-December compared to 14.35% in April-November. Net tonne kilometres also slowed down to 6.39% Apr-Dec from 7.37% in Apr-Nov. • While rabi crop sowing has been on greater acreage than last year in most crops, some crops like urad, groundnut, safflower, sesamum have seen lower acreage sown. • Rise in January temperatures however do not augur well for wheat crop, govt has been worried on this score. Read: Rebound in PMI Obama is Jamal Inflation
  6. 6. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Consumer price rises have slowed down, with the CPI AL and CPI IW indices dropping in December, inflation however stayed high at 11.14% and 9.7% respectively. • Wholesale Price Index which had been dropping since September, showed a rise again in January. The drop from double-digit inflation in October to around 5.5% levels in January has primarily been the result of fuel price declines. • Sugar, oil cakes and wheat are some commodities whose prices have risen. Food articles inflation stood at 11.17% for the week ending January 17th, compared to 2.27% a year ago. • Crude oil output has been slashed in January by OPEC, aiming to stem the bleeding losses. India plans to move to deregulate fuel prices, read link below on the implications. Read Spell it out and stick with it Interest Rates Indian bond yields have been choppy since the • middle of December, with the 10 year benchmark gilt hitting 5.0536 on 5th January and rising since then to touch 6.2044 on 30th January. • The new 10 year benchmark gilt 6.05% paper maturing in 2019 has low volumes so far.
  7. 7. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • The RBI held rates steady in its January end policy review, though it has given all indications of further cuts if needed. The liquidity generated with the aggressive cuts in the last two months need to filter through the system. • Sharp differences in central bank responses now emerge as economies battle their own woes – Bank of England will slash rates to boost an economy that is slated to be the worst performing economy in the world (IMF sets growth at -2.8% in 2009-10), ECB continues to be wary of reducing rates to historic lows. Read Happy days are here again for the RBI Bank of England to cut, ECB stands pat Exchange Rates • Exports in December fell by 1.1% in dollar terms and grew by 22% in rupee terms thanks to the depreciating rupee, while imports rose by 8.8% in dollar terms and by 34.2% in rupee terms. • While oil imports fell by 30.9% in dollar terms reflecting the fall in crude oil prices, non-oil imports were 31.9% higher in December compared to the previous year, showing continued domestic demand. • Trade deficit for April-December was estimated at US$ 93.8 billion, higher than the US $ 59.98 billion for the same period in the previous year.
  8. 8. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The rupee has been falling since the low of 47.08 on • 19th December to range around 49 to a dollar by the end of January, its movement taking cues from the stock market. Read Keep trading The coming trade wars
  9. 9. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx For query or placing orders on Indicus Products please contact Indicus Analytics Pvt. Ltd. 2nd Floor, Nehru House, 4 Bahadur Shah Zafar Marg New Delhi- 110002. Phone: 91-11-42512400/01 E-mail: products@indicus.net www.indicus.net

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