Emerging Economy - Indicus Analytics - A compilation

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics A compilation of the last 16 Issues up to January 2010 1

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 5th January 2010 Highlights • Future growth on much firmer footing – across manufacturing, services and agriculture sectors • But corporate hiring and investment to stay flat for another quarter • Tax collections - Boost in advance tax but indirect tax collections much lower than expected • Good rabi output expected, of course, if weather holds up • Inflation concerns will reflect in small increase in CRR and rate hikes by RBI this month 2

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx With the worst of the economic crisis behind us, we look ahead to forecast trends for the decade ahead – growth is set to be much faster than the last ten years. The driving force of the decade? Transport, storage and communications - a large road network is going to be operational, ports are rapidly improving, air transport infrastructure is being overhauled, and most important, a strong ecosystem has been created for the telecom sector. The mainstay of the Indian economy for so many decades, agriculture could well grow faster than the expected 3.4% - a rural road network has been built up, high agri commodity prices would improve terms of trade towards this sector, rural human capital has improved tremendously in the 2000s, new technologies are about to enter on a mass scale, agri reforms such as the APMC acts are being overhauled. Though it is difficult, to time the tipping point, in Indian agriculture – we would expect it to be somewhere after the middle of the decade though we may need to wait till the 2020s for the full impact of these changes to be felt. Rapidly growing domestic and international markets will keep manufacturing opportunities buoyant, but there would be spoilers in the shape of energy, wage price inflation, the unresolved labour and land issues. Bottom-line? Overall GDP growth will be around 9.6% annually, even if the government does not do anything radically different. It would be higher if agriculture and electricity, gas and water supply are able to break through their long term institutional constraints. It would be lower if inflation eats into macro-economic stability and law and order conditions get out of hand. 3

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx This does translate into greater per capita income and changed households budgets. Here again, transport, education, health and recreation would all be among the most rapidly growing items of consumer expenditures. The tipping point is not so much in health or education in the aggregate, but in goods and services that promise better lifestyles. Despite such a rosy scenario, India will not rid itself of poverty - almost 200 million persons are likely to remain extremely poor by the end of the decade. Social safety nets would continue to be critical – the impact of these on the fisc can be minimised if governance and institutional change remove inefficiencies in distribution. Indians remain one of the most optimistic people on the globe, growth prospects are bright even as numerous issues need to be resolved. But the true test of success would be when the energy in entrepreneurs and consumers brings us a greener, more equitable decade. P.S A more detailed explanation of these forecasts and trends, with graphs was published in the Indian Express, available now on our website. Sumita Kale and Laveesh Bhandari 5th January 2010, Indicus Analytics Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can be contacted at sumita@indicus.net and laveesh@indicus.net. 4

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Economic Growth • HSBC Markit Purchasing Managers Index rose again for the first time in 3 months to 55.6 in December. New orders index at 60.1 was at its highest this year. • IIP rose by 10.3% in October over last year’s low growth of 0.1%, with manufacturing reviving at 11.1%, mining at 8.2% and electricity at 4.7%. • Electricity generation in November stood 3.27% higher than last year. In December, provisional output estimates put growth at 6.2%. • Cement production increased by 12.7% in November over last year, with sales rising by 11.3%. • Steel production (total finished steel, alloy + non- alloy) was at 38.961 million tonnes during April- November, 2009, a growth of 2.5% over the previous year. Consumption of total finished steel (alloy + non-alloy) was at 34.304 million tonnes during April-November, 2009, a growth of 6.8%. • Telecom added 17.65 million new subscribers in November bringing tele-density to 46.32, highest growth is in Circle B. Total broadband subscribers reached 7.57 million. • Rail freight traffic increased by 9.22% in November, revenue earnings from commodity- wise freight traffic rose by 10.08% during the period April-November over the same period last year. • Hiring in November grew at 8.4% over the previous month, with auto, telecom and insurance showing strongest growth. Of the top 7 cities, 6 saw an uptrend in hiring, according to Naukri Jobspeak index. • Vehicle sales continued to rise in December – Maruti became the first car in India to cross the 1 5

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx lakh sales mark , 1,00,874 units, Tata Motors recorded 100% growth in the month over last year, Hero Honda sales rose by 74%, TVS Motor by 34.06%, Bajaj Auto by 77 %. • Rabi crop sowing stood at 85% of normal sown area, 1.8% up from last year – Prominent crops with increase in sowing this year so far include wheat (2.3%), rice(46.2%), gram and lentil (11.4 and 11.6% respectively) while those which are still below last year’s sowing mark include peas( - 10.6%), jowar( -9.2%), urad (-5.1%), oilseeds (-3.7%). • Advance tax collections rise 20% in the April- December period, compared to last year as companies cut costs and met buoyant demand. Automobiles, consumer goods and metal firms led the rise. Direct tax collection, which includes corporate and personal taxes, rose by 8.1% to touch Rs. 2.27 billion in the period till December. Read Renovating our image http://www.telegraphindia.com/1091229/jsp/opinion/st ory_11919270.jsp India 2020 – what will we be like http://www.business- standard.com/india/news/india-2020will-we-be- like/381393/ India to overtake China in 2020 http://economictimes.indiatimes.com/Swaminathan-S- A-Aiyar/India-to-overtake-China-in-2020- Swaminathan-Aiyar/articleshow/5401241.cms Inflation 6

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • WPI All Commodities inflation has been rising rapidly as the base effect has run out – stands at 4.8% for November, while manufactured products inflation stands at 4.0% - both provisional estimates. • Latest primary articles inflation is at 15.5% for the week ending 19th December while the group of fuel, power, light and lubricants has turned positive, the first time since December 2008. • Consumer price inflation continued to go higher in November – 13.51% CPI IW and 15.65% for CPI AL. This is on top of a double-digit inflation for last November. • Crude oil traded in the range of $78.68 to $70.1 in December, up by 85.6% over last December’s low prices. While there is pressure on the govt. to raise fuel prices domestically, there is some cushion coming in from the rising rupee exchange rate so far. • PMI survey reports pressure on manufacturers to raise prices - steel prices have already been increased in January, keeping with the buoyant domestic market, auto makers are looking to raise prices in line with rising input costs etc. • Sugar surged again in the last week of December with apprehensions that output estimates would not be met. Read The price of oil in 2010 http://in.reuters.com/article/economicNews/idINIndia-4 5123220100104 Interest Rates • The yield on the 10 year benchmark gilt rose in December from being less than 7.2% in the last week of November to touch 7.6934 on the 1st of January. 7

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Rising inflation numbers as well as input price rise raise concerns of rate hike by the RBI in the January end review. While CRR is set to be hiked in all probability, there is likely to be a rise in the reverse repo of 25 basis points as the RBI will signal its readiness to stem inflation. • World-wide 2010 will see central bankers raising rates, though the timing and quantum will depend on individual domestic factors. Read Fed’s road to neutral is riddled with potholes http://www.bloomberg.com/apps/news? pid=20601039&sid=apuJ4PPRa2MM Bank of Korea hints at rate hike in 2010 http://www.forextv.com/Forex/News/ShowStory.jsp? seq=1168687&category=Economic+News Exchange Rates • BoP statistics released for April-September 2009 : 1. Lower trade deficit (US $ 58.2 billion) led by lower oil import bills 2. Lower net invisible surplus (US $ 39.6 billion) led by lower software services and decline in business services and investment income 3. Higher current account deficit (US $ 18.6 billion) due to lower net invisibles 4. Large net capital inflows mainly led by turnaround in FII inflows and steady FDI inflows 5. Increase in reserves (excluding valuation) of US $ 9.5 billion (as against a decline in reserves of US $ 2.5 billion in April-September 2008) due to large capital inflows and SDRs allocations by the IMF 8

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Exports during November 2009 valued at US $13.199 billion, 18.2 % higher in dollar terms and 12.4 % higher in rupee terms than last November. • Imports in November 2009 are provisionally estimated at US $22.888 billion, lower than last November by 2.6 % in dollar terms (minus 7.4 % in rupee terms) • Oil imports during November 2009 were valued at US $6.389 billion, 7.3 % higher than last year. Non-oil imports at US $16.5 billion was 5.9 % lower than last November. • The trade deficit for April- November, 2009 was estimated at US $66.183 billion which was lower than the deficit of US $ 100.152 billion during April- November, 2008. • FII net inflows in equity markets of $ 2.198 billion in December brought the total of net inflows in 2009 to $17.457 billion. • Forex reserves for India stand at $ 283.499 in the week ending 25th December 2009. • The rupee has been fairly stable in December, moving in the range 46.2 – 46.9 to the dollar and is expected to stay within the 46-47 range in January. Read Major currency risk in 2010 http://www.emecklai.com/JoyToTheWorld.aspx? Type=C22 Recommendations Indicus IE Happy New Decade, India! Strength in numbers FE Person of the year – the rural consumer 9

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Young and going it alone The urban consumer – putting numbers to gut feel The economic case for creating smaller states Homing in on class A households A developmental case for statehood Worst may be over on food price front Protect manufacturers from inflation – PMEAC Understanding the Indian consumer 10

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 9th December 2009 Highlights • 7.9% growth in second quarter powered by govt, lower growth next quarter • Growth in 2009-10 still estimated by us at 6.7%, agriculture well factored in • As expected, exports decline even lower in October, return to low levels of positive growth by March • Inflation hits manufacturing as well as commodities rise on stronger growth • Capital controls on the radar as inflows increase 11

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx From the beginning of this year, we have been predicting a growth rate for 2009-10 at 6.7%. While most analysts have been revising their estimates upwards throughout this year, we maintain our growth estimate, despite the high 7.9% release by the government for the second quarter. There are two reasons for this – one, as the government itself has pointed out, the impact of the drought this year will make itself felt only in the Q3 estimates, when the kharif output is out, and two, the high growth in the second quarter is largely powered by public administration sector. In fact, if the community services, public administration and defence sector is given half its growth estimate of 12.4% in Q2, in line with previous quarter’s growth, GDP growth comes down to 7%. The government and the Reserve Bank know this, which is why a rate hike before January appears unlikely. Rising inflation is leading to rising tempers in the Parliament, not quite a healthy way to resolve an issue that is hurting so many. Wholesale prices of many essentials are up: milk by 8.27% since March-end, pulses by 25.02% and though the sugar price rise has moderated, it is still expected to rise after March as supplies get tighter globally. So what is the solution here? Market reforms in the supply chains of agricultural produce have been mooted many times but not acted upon enough. Improvements in storage and processing of produce will also go a long way in improving supplies. And there are more linkages being ignored in the inflation story. Take for instance, the change in visa rules for employment of foreigners last month. On the face of it, this has nothing to do with inflation, but this is one example of how the government creates hurdles in the smooth flow of goods and services across the country. The new rules have taken Chinese workers off a road being constructed in Himachal Pradesh. A road bringing better 12

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx connectivity to the apple belt, which contributes 40% of the state’s apple cultivation and which annually suffers from wastage of Rs. 1200 crore due to poor transportation. The new visa rules in fact are a true symbol of how the government works. One ministry has little to do with the other, the impact of a policy change is not fully understood, and the government effectively just treats the symptom and ignores the underlying cause of the problem. The main reason why foreigners with the same skill sets as Indians are getting jobs here are because efficiency and productivity, much needed by Indian firms, are not a part of ‘skills’ as defined by the government. It is of course easier to just change visa rules, rather than change vocational training education on a large enough scale to account for these deficiencies. But then again, without any structural changes, talking of a 9% growth rate becomes as unsustainable as the previous years. Overall therefore, there will be some tempering of the growth numbers next quarter. Inflationary pressures will continue in the short, medium and long term. Commodities will once again face inflationary pressures and so will real estate. The economy is warming up, and we see every reason for it to heat up in a couple of quarters. The real challenge for macro management will emerge in a couple of quarters. Please visit our homepage for updated interactive time series graphs of economic indicators and blog posts throughout the month. 13

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Sumita Kale and Laveesh Bhandari 2nd December 2009, Indicus Analytics 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 • GDP growth for the second quarter of this year July-September has been estimated at 7.9% , with agriculture showing a positive 0.9% growth, manufacturing at 9.1%, and the services sector at 9.3% • The highest performing sector was community services and public administration growing at 12.7%, the impact of the Pay Commission payouts. • IIP for the month of September showed high growth of 9.1%, manufacturing at 9.3%, mining at 8.6% and electricity at 7.9% • HSBC- Markit PMI showed a dip in November in manufacturing activity, the index stood at 53 compared to 54.5 in October. New orders index fell to 54.6, its weakest level since March • Electricity generation grew by a mere 2.2% in November, according to provisional data, while final figures for October show growth at 4.67%. • Car sales rose by double digits in November, as Maruti recorded a 60% growth, Hyundai 93%, Tata Motors 48%, while two wheeler sales were 14

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx powered by Hero Honda which saw its highest sales ever in November – at 3.81 lakh units. • Railway freight traffic increased by 11.72% in October over the last year, a rise of 7.12% for the period April-October • Naukri Jobspeak index shows fall in hiring by 3.8% in the month of October over the previous month. IteS, BPO, Pharma/Healthcare and Banking are the sectors with positive hiring growth in October. • Cement production increased by 6.6% in October over the previous year, while cement despatches rose by 9.0% • The Baltic Dry Freight Index rose to a 14 month high, reflecting higher global activity, while ports in India recorded 46.6 million tonnes of volume in October, a rise of 11% yoy. Read In conclusion Signs of a V shaped recovery Inflation • Reporting on the wholesale price index has changed since November 14th – weekly data released only on primary, fuel and light groups, while data on manufacturing goods released on monthly basis. • Provisional WPI inflation for October stands at 1.3%, with manufacturing at 1.4%. • Weekly rate for primary articles rose to 11.0% while fuel and light group declined by 1.5%. • Consumer price indices continue to show sharp increases as these are heavily weighted by food 15

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx items – CPI AL inflation stands at 13.73% and CPI IW at 11.49% in October. • Crude oil touched a high of $78.64 in November, the highest it has been since last October – crude oil price averaged higher by 46.12% in November. • While sugar price rise has moderated in the last few weeks, the outlook for the year ahead is not positive for consumers as supply constraints plague the global market. • HSBC-Markit PMI survey showed strongest rise in output prices in November, since last September, pointing to the pressures coming in from higher input prices. Read Mixed veg – the real story on food prices Sugar prices to stay high, may even rise after March Interest Rates • The yield on the 10 year benchmark gilt that had fallen in the last week of November due to higher liquidity rose sharply on the 30th of November to touch 7.2798% on 1st December as the high growth estimates pointed to a tighter monetary policy ahead. • The Reserve Bank is looking to make further moves on its exit strategy but given the fact that growth is still looking weak, rates would in all probability be raised slowly from January onwards, depending on the credit offtake and the inflationary pressures coming in from manufactured items • Reserve Bank of Australia tightened for the third consecutive month, creating a record of three straight increases. 16

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • While Israel has gone in for a rate hike as well, unexpectedly, Korea and Indonesia are still holding out, Brazil has chosen to put a tax on short-term capital inflows to discourage volatile capital movements. • The major banks of ECB, Bank of England and the Federal Reserve are not expected to move on rate hikes for another quarter at least, given the weak growth in their economies. The fallout of the low rates in the US, however, has been on the exchange rate. Read Tighter capital controls in Asia inevitable Exchange Rates • Exports declined by 6.6% in dollar terms in October over the previous year (minus 10.3% in rupee terms), standing at $13.193 billion. Imports valued at $ 21.994 fell by 15% in dollar terms( minus 18.4% in rupee terms) in October. • Oil imports were lower by 9.3% in October while non-oil imports were down by 17.2%. • Trade balance estimated at $ 57.318 billion was less than deficit of $87.827 billion for the period April- October. • This level of trade reflects the lower level of global activity – a fall by 11.9% in trade volume according to IMF estimates and lower commodity prices by 20.3%, oil prices have averaged 36.6% less than in 2008. • However, this trend has already reversed and can be expected to exert pressures on the rupee in the 17

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx months ahead. Copper has hit a 15 month high, gold has surged to a record $1200 an ounce • Forex reserves stood at $ 285.344 billion for the week ending November 20th, a rise of $ 29.376 billion over last year. • FII investments to the tune of $1.183 billion in equity and $ 0.147 billion in debt have taken the total net investment since January 2009 to $15.258 billion in equity and $1.375 billion in debt markets – compared to a net outflow of $ 12.332 billion in equity markets during the period April-November 2008. • Capital inflows have pushed the rupee up – a high of 46.09 to the dollar in November and low of 47.13, compounding the pressures coming in from a weak dollar overseas. Read Has RBI been diversifying out of dollars? Dollar/yen reversal in prospect The great trade collapse Recommendations When foreigners build roads better Experts raise growth predictions for India A dining table drought 18

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 9th November 2009 Highlights • Stronger recovery across the globe – trend to continue at slow pace • RBI refrains from rate hike in October, expect action only after January • Inflation in consumer prices continues unabated, expect reduction in pressures only by January • Exports decline reduced, horizon appears brighter • Overall – a positive outlook on the economy over the next quarter Good tidings from across the globe as manufacturing showed stronger signs of revival even in advanced economies that were the epicentre of the crisis. India still appears the brightest growth prospect for the year-ahead; all estimates seem to be converging on a 6.5% growth rate for the current year. The stimulus package meanwhile will continue to stay, the FM has said there are no immediate plans to even think of an exit strategy, “I will take a view on it as and when we are convinced that the economy has come out of the 19

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx worst situation and is in the firm path of recovery” he said at the Economic Editors Conference in Delhi last week. That begs the question what defines the path of recovery? The simple long term problem remains – would a ‘recovery’ be sustainable if it has the same basis as the previous high growth trend? Engineering even this much of a recovery as we see now has come at a cost. Tax revenues in September rose by a bare 0.8%, and are down by 7.6% for the first half of this year. Custom and excise revenue were lower by 33% and 23% respectively for the period April-September, compared to last year. The fiscal deficit by the end of September stood at Rs. 197775 crores, last year it was Rs. 102654 crores. We think it is irresponsible to let investment and consumption decisions continue to be based on these current parameters. Everyone should be aware that this is a ‘punch bowl’ that will be taken away sometime and make appropriate plans. Monetary policy too is looking worldwide at when and how to exit from the current low rates, each country will take its path according to domestic compulsions. But rate hikes are inevitable sometime next year. The ‘happy’ times can only last a short while. On the agri front, with rains in October, the kharif sowing recovered to some extent, though rice still remains badly hit, the deficiency in acreage sown has dropped from 61% in mid-September to 15% in mid-October. Sugarcane production will be lower this year globally, heavy rain in Brazil has left 10% of the crop unharvested. Raw sugar prices can surge to 30 year highs by December-January, according to some commodity analysts. Imports by India therefore will bear the brunt of this price rise. Bitter-sweet times ahead. On the squabbling on the political front, the less said the better. 20

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Please visit our homepage for updated interactive time series graphs of economic indicators and blog posts throughout the month. Sumita Kale and Laveesh Bhandari 9th November 2009, Indicus Analytics 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 burst into double digit growth in August at 10.4% for the first time since October 2007. With a low base effect from last year, this implies that growth is trending back, albeit slowly. • Manufacturing grew at 10.2%, mining at 12.9% and electricity at 10.6%, showing well rounded growth • Infrastructure industries had slower growth in September, at 4%, the same rate as last September, with only the electricity sector outperforming its last year’s growth. • Electricity generation had low growth in October, provisionally estimated at 3.97%. • Final monsoon deficit for the country ended at 23% below normal. With post-monsoon rains in October, water levels in reservoirs continued to rise to reach 96.08 BCM , but were still 87% of last year and 94% of the ten year average levels. 21

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • For the kharif crop, sowing has recovered with the late rains, down by 15.7% for rice, up by 5.6% for pulses, while cotton has increased in acreage by 13.4%. • The HSBC-Markit PMI survey showed a slightly lower level of expansion in October at 54.5 levels of the index, new orders index fell to 56.7 while employment index rose to 50 and export orders reached the highest level since August 2008. • Indian Railways freight earnings rose by 7.5% over the period April-September, with the Net Tonne Kilometres rising by 8.4%. • Employment is looking up, the Naukri Jobspeak index showed a rise in hiring activity in September, higher by 4% over August numbers. • Auto sales continued their rise in double digits through October, Maruti sales rose by 21%, Hyundai rose by 41%, Tata/Fiat JV rose by 28%. In two-wheelers, Hero Honda saw near flat sales in October over last year, while Bajaj Auto had a 52% growth. Read Signs of global recovery reinforced by manufacturing data Inflation • As stated in the last newsletter, WPI final inflation went into the positive territory from August itself, as revisions are revealing. • Provisional inflation for the week ending October 17th is 1.51% • September consumer price data shows high inflation at 11.64% for CPI IW and 13.19% for CPI AL. 22

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Sugar prices have risen to a record high, up 31.02% since March end with estimates of lower production this year. However imports are scheduled to restrain the price hike. • Steel prices have been cut and HSBC- Markit PMI survey data for October shows a moderation in both input and output price indices, giving some relief to policy makers. • Brent crude hit a high of $ 78.36 in October, as global recovery has sent a spurt in the price. Last October prices crashed from an initial $92 to $60 by the end of the month. Read Special PDS basket trimmed Interest Rates • With the October review setting hopes for a rate hike, the 10 year benchmark gilt rose to 7.4404% on 23rd October, before calming down to 7.3004% at the end of the month. • While the RBI did not raise key rates, the SLR was raised by one percentage point and a clear mandate for raising rates in the near future has been set out. • The RBI is expected to raise rates in early January, essentially to curb inflation expections, however the growth-inflation trade-off is being closely monitored to restrict damage to recovery. • Every country is looking at its domestic compulsions to move towards an exit strategy: Australia raised rates for the second month in a row Read Implications of Central Banks’ Exit Strategy 23

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Monetary policy and fiscal consolidation Exchange Rates • Exports during September were valued at US $ 13.608 billion, 13.8 per cent lower in dollar terms (8.4 per cent lower in Rupee terms) than last September, a deceleration of the negative trend. • Imports during September were valued at US $ 21.377 billion lower by 31.3 per cent in dollar terms (27.0 per cent in Rupee terms) than last September. • Oil imports were 33.5 per cent lower than last September while non-oil imports were lower by 30.4 per cent. • Trade deficit for the period April- September stood at $ 46.73 billion, compared to $76.1 billion last year. • FII inflows continue, $1.947 billion in equity and $1.48 in debt during the month of October. • The RBI bought 200 tonnes of IMF gold to shore up the latter’s finances. Forex reserves stood at $ 285.52 billion on October 23rd, up $29.552 billion from last year. • The rupee surged to 45.8 to a dollar in mid-October but has since fallen again to levels of 47-47.5, as the dollar recovers some of its lost value. Read Indian exports decline least this year as global slump eases India shining, India scraping 24

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Recommendations A Rs. 60,000 crore scandal India’s mollycoddled ironmen India’s rural markets: myth or reality RBI warns of inflation amid growth Rising food prices drive inflation to 1.21% Coarse cereals can do the job too Gurgaon’s success masks Haryana’s woes 25

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 7th October 2009 Highlights • September rains bring fresh hope for rabi crop in the winter • Inflation moves into positive territory, expect 7% by March end for the WPI • Lacklustre export scene to continue as international recovery slow • Infrastructure sectors show better performance than last year – construction on an upswing • Exit strategies discussed worldwide, timing and pace to differ across countries • RBI shows inclination to raise rates earlier than other economies to reign in inflation expectations The festive season rolls in again and with it, the stock market is busy spreading cheer. IIP numbers, as we had expected are rising; the HSBC- Markit PMI survey confirms expansion in manufacturing activity in September with encouraging news on the new orders front. Vehicle sales are also up and as the mood sets in for rate hikes next year, credit markets are set to buzz once more. From this month onwards great times are expected at the consumer markets. 26

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Exports though continue to reel under impact of international slowdown, August data shows decline of 19.4%. We can expect this lacklustre scene to continue through this year as global recovery is still slow, apart from a few specific sectors where large companies are diverting their international value chains towards India e.g auto sector where we beat China in exports earning rave reviews globally. In general, the up-trend appears to be quite well spread across the country, while Mumbai seems to be the most upbeat, on back of re-entry of international capital via FIIs. Rains finally did show up and conditions in the north-west are not as bad as expected a couple of months back. There are therefore great expectations from the rabi crop now. One worrying issue that we have highlighted before is the growing Naxal activity. Naxals are a response to a non- functioning and badly performing state. The less one trusts the state to act in a fair manner, the more clout the Naxals get. There has to be a fundamental change in governance to strike at the roots of this counter- insurgency. Meanwhile, Naxals are concentrated in areas with large tribal populations, and almost all large projects in these areas are stuck. The government will be ‘forced’ to use greater force to counter the Naxals. But the point remains that rehabilitation has never been a priority for any government at the state or the centre, thus playing into the hands of the Naxals. The impact at the macro- level will play out with large projects being inordinately delayed because no one really trusts the promises of the government or private entities on rehab in any of the tribal dominated areas in the eastern states. Last month we explained why it is not in India’s long term interest to tread the route of foreign loans even if the option looked attractive in the short-term. Sooner than we 27

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx expected, though, the World Bank approved a loan of $4.3 billion in September – the second largest loan for a single country in a single year. Interestingly, this loan is said to be in support for India’s economic stimulus, a country that the World Bank itself projects to be fastest growing country in the world next year. Such support may be comforting to some but we reiterate: high fiscal deficit and a rising debt burden are hardly a recipe for sustainable growth. We begin the fifth year of this newsletter and would like to thank all our readers for their feedback over the years. Please visit our homepage for updated interactive time series graphs of economic indicators and blog posts throughout the month. Sumita Kale and Laveesh Bhandari 6th October 2009, Indicus Analytics 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 • Industrial production showed 6.8% growth in July in the first estimates released by CSO. June output growth was raised from 7.8% to 8.2% in the first revision. • Infrastructure industries continued to shine bright in August with growth of 7.1% compared to 2.1% last August. Cement at 17.6% and coal at 12.9% were the star performers. • Electricity generation in September grew by 6.7% over the previous year, as per provisional estimates by CEA. 28

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Rains in September brought the gross deficit in the country down to 21% departure from normal. Yet, floods in the south have threatened to wipe out some of the gains. • The main crop to take the hit this monsoon has been rice, whose sowing was down 61.09% by 16th September. However, with late rains, the rabi crop is expected to do well. • The HSBC-Markit PMI survey showed an uptick in the manufacturing activity index in September to 55, new orders were also buoyant. • Auto sales surged in September as car sales reached a new high of 1.53 lakh units, higher than the previous high of 1.29 lakh units sold in March this year. – Hyundai posted its highest sales ever, Maruti at 11% growth, Tata Motors at 23%, Mahindra and Mahindra 37%, GM at 47% etc. while motorcycle sales also grew at a brisk pace. Hero Honda and TVS sold 4% more units in September, while Suzuki sales grew by 26%. • Indian railways carried 12.18% more freight traffic in August compared to last year. • 15.08 million new subscribers were added in the wireless segment in telecommunications in the month of August, bringing the teledensity in the country to 42.27%. • Naukri Jobspeak index showed a fall in hiring in August over July levels by 3.6%, however it appears that the general uptrend since April will continue ahead. • The Baltic Dry Index for Shipping has been extremely volatile over the last year, raising sufficient doubt about sustaining recovery in global demand from China. Read 29

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx EU debates crisis exit strategy Is Baltic Dry a harbinger of doom? Inflation • WPI provisional inflation went into positive territory from the week ending 5th September, however with sharp upward revisions to July data, it is likely that inflation was positive in August itself. • Consumer price data for August shows high growth with inflation at 11.72% for CPI IW and 12.89% for CPI AL. CPI UNME inflation for July stood at 13.04%. • These high levels of inflation follow the high prices rises in food commodities like sugar (44.5% yoy for WPI week ending 19th September), cereals (13.17%) and pulses (20.05%). Vegetables at 49.5% show the highest year on year rise. • HSBC- Markit PMI survey data for September shows output price index reaching a one year high, indicating that higher input prices are being passed on to consumers now. • Brent crude has been quite volatile this month, ranging between a low of $64.6 and high of $71.56 per barrel. While these levels are still 30% below last September’s prices, crude is still valued at double the December 2008 lows. Read UPA’s Marie Antoinette Syndrome 30

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Interest Rates • The 10 year benchmark gilt which saw 7.4397% yield on 1st September fell to a low of 7.0661% and climbed up slightly touching 7.1981% on 1st October. • While rate hikes are eminent the world over, the exact timing and pace would differ from country to country, depending on the growth and inflation scenarios. • Inflation in India has been pushed by primary articles but the PMI survey indicating rising output prices is not a comfortable sign for the RBI. Nor are the ‘back in favour’ stock market and realty offers. • On the other hand, non-food credit is still to look up, currently at half the levels of the previous year. • There is however a strong likelihood of the RBI being pushed into raising rates by early 2010 to signal their unwillingness to stomach year end inflation of more than 4-5%. Read Bonds should rally- RBI Deputy Governor Any HTM hike will be a blow to credit market Policy continuity at RBI Exchange Rates • Exports during August were 19.4% lower than last year in dollar terms (9.2% lower in rupee terms) while imports fell by 32.4% in dollar terms (23.9% in rupee terms). • Oil imports were lower by 45.4% in August and non- oil imports fell by 25.5%. 31

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Trade deficit for the period April- August stood at $38.17 billion, compared to $60.73 billion last year. • Balance of payments data for Q1 2009-10 shows that despite net invisibles surplus with buoyant private remittance inflows, the sharp decline in exports brought the current account into deficit of $ 5.8 billion(compared to $9.0 billion in Q1 2008-09). • Capital inflows showed a revival, especially foreign investments, bringing around the capital account from a negative balance in the last two quarters of 2008-09 to a positive balance of $ 6.7 billion in Q1 2009-10. • Portfolio investment turned from net outflows of $ 2.7 billion in Q4 2008-09 to net inflows of $ 8.3 billion in Q1 2009-10. • With positive inflows and a weaker dollar overseas, the rupee strengthened to touch 47.86 to a dollar on 1st October. • The dollar has fallen 14% against a basket of seven currencies since March but is set to rise, see Mecklai article below. Read The calm after the storm Giethner says ‘Very important’ to have strong dollar Recommendations Demand Curve :Cities of the West powering India Fe- Indicus Policy Series – Let coal be green How the states were ranked: State of the States 2009 32

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Factbox: What it takes to rebalance the global economy Activation de l'équité et l'efficacité grâce aux enchères en Inde 33

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 8th September 2009 Highlights • 6.1% growth in 2009-10Q1, drought restricts potential ahead • Construction and services power growth while manufacturing picks up • Need to target rabi crop as monsoon deficit stands currently at 25% • Growth estimated at 6.6% this fiscal, inflation bigger worry • While food price pressure will ease by winter, commodities set to rise e.g steel India: Kal, aaj aur kal Throughout the gloom of last year, we have been optimistic about the growth in India, our estimates of more than 6% growth this year were amongst the highest while finance whizzes were busy forecasting dire numbers in the range of 4-6%. In our January newsletter we had said that by the second half of this year, there would be an overall improvement. We had also cautioned that a deflationary situation that was being discussed was of little import here where inflation would be the prime worry. As the months passed and the revival became more apparent, estimates were rapidly revised upwards, both of growth and inflation. Though some find this surprising, we maintain, that this was all predictable, as was the downturn, and as is the inflationary environment in coming months. As we go ahead, growth will show ‘surprising’ levels, e.g. the IIP numbers can get close to 10% - on the back of low base of last year, electricity and 34

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx mining are doing better this year, vehicle sales are soaring with domestic festival demand etc. We see no reason to cheer though. The past year has taken a heavy toll on the finances of the government and investment plans in the private sector, consumer confidence has also been hit hard, while inflation has eaten gaping holes in the common man’s wallet. Moreover, the true impact of the poor monsoon will be known only by the year end. The financial sector types meanwhile are having a field day once more, rapidly pushing up spirits and stock markets. Some are even getting into debates on whether this slowdown would take the shape of a V, U, W, or the Riemann’s zeta function, as Bloomberg columnist Moynihan quipped. It is important to remember though that the ‘green shoots’ which are growing tall now have sprung up in response to fiscal stimuli and rate cuts worldwide, not through any change in fundamental factors. Work is on towards changing standards of regulation and supervision internationally, but these will take time to be implemented. In the meanwhile, we have to point out that we are now tired of stressing on one issue - that such high levels of expenditures, in India and abroad, are inflationary whatever way one tries to handle it. Expectedly, the rational components of financial markets recognize this problem and we are seeing significant upward pressure on interest rates. This is a natural outcome of government over- spending. There is a possibility that to get around this problem this government may try to borrow from abroad. And if that happens on a large enough scale, the final degree of freedom that the government will have, would have been used up. We therefore do not support such an initiative, despite its short term advantages of keeping upward interest rate pressures under check. Note that India has done something similar in the past (during the Rajiv Gandhi years) when it borrowed internationally and spent on unproductive activities. For a few years things looked very good, but pressures were building. The ruling conglomeration in the post Rajiv Gandhi years just did not have the ability to handle the pressures so generated. We all know the final outcome. At the end of the day we cannot spend this much without paying for it one way or another. And it is better to pay by way of lower investment, higher interest and prices, rather than macro-economic instability. But the first best solution remains the same - don’t spend on unproductive activities please. 35

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx PS. Please visit our new homepage for interactive time series graphs of economic indicators http://www.indicus.net/ Sumita Kale and Laveesh Bhandari 8th September 2009, Indicus Analytics 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 • GDP estimates for 2009-10 April-June quarter put growth at 6.1%, the first rise in six quarters. • Manufacturing recovered to post a 3.4% yoy growth in the April- June quarter, compared to the negative 1.4% in the previous quarter. • While mining turned in a high 7.9% growth and construction at 7.1% showed an upturn, the highest growth in this quarter was recorded at 8.1% by the service sectors of trade, hotels, restaurants, transport, storage and communications, and banking, financial and insurance services. • Agricultural sector growth at 2.4% reflects last years rabi output. Production is expected to drop this year on monsoon deficit. • With rainfall deficient by 26% by the end of August, 278 districts were declared drought affected. • While water levels in the 81 major reservoirs rose in August, the overall levels are still lower than last year and the 10year averages. 36

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Sowing of cereals was down by 14.1% on 21st August, compared to the previous year, while pulses had risen by 7.4%. Cotton sowing had increased by 12.3%, sugarcane had reduced by 2.9%. • In August, electricity generation was 9.76% higher than last year, according to CEA’s provisional estimates. • Markit PMI survey showed the fifth consecutive month of industrial expansion, at 53.2 in August, the index was down from the revised 55.4 level in July. • Car and bike sales soared in August, the beginning of the festive season – Maruti car sales up by 29%, Hyundai rose by 13%, Tata Motors and Fiat by 26%, Mahindra and Mahindrar by 42%; Hero Honda saw bike sales cross the 4 lakh mark in August, up 36% from last year. • Infrastructure sectors in July showed poor growth overall at 1.8%, compared to 5.1% last year, with just cement and coal clocking high growth at 10.6% and 9.6% respectively. • Cement production was 10.63% higher in July than the previous year, while sales were up by 9.92%. • Railway freight traffic rose by 5.83% in July over the previous year, while revenue generated by freight traffic increased by 4.77% during the April- July period, compared to the previous year. • Naukri Jobspeak index rose in July by 1.6% over June hiring in the country. • Telecom subscribers in the wireless segment rose by 14.38 million in July, while wireline subscribers declined by 0.13 million, bringing tele-density in the country to 41.08 at the end of July. Read V defies economic pessimists seeing L, U, W Why growth in bank credit is low Green growth of 8% by 2030 possible 37

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Inflation • Provisional WPI inflation inched upwards in August, though still negative at 0.21% for the week ending August 22nd. Upward revisions continue for June estimates. • Food is the prime driver for the price rise, and pressures are expected to ease by winter once produce comes into markets. • Sugar is the main worry with prices up 64% this year, and production for the year ahead expected to be lower than last year – while Indian output has been hit by less rain, Brazil’s sugar output may be less due to heavy rains. • Consumer price indices report double-digit inflation in July – 11.89% CPI IW and 12.90% for CPI AL – on a high 8-9% base of last year, consumers have been caught in the grip of inflation. • Spot prices of agri commodities on NCDEX have moderated after 12th August, following a steep rise since 9th July. On September 1st, the NCDEXAGRI stood at 7.65% higher than its August 1st index level. • While cement prices have fallen in August, steel prices are set for a hike as demand grows. • Brent crude spot price in Europe climbed up to $ 74.34 a barrel on August 24th as signs of economic recovery across the world came in. Read India sugar hits record high Interest Rates • The 10 year gilt yield moved above 7% in August and touched 7.4397% on September 1st. • Interest rate futures have been launched again on NSE, bringing more depth into the bond markets. • With inflationary pressures in the system, high borrowings and recovery of the economy, RBI is expected to raise rates by the year end. 38

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Central banks worldwide have now reached the end of their rate cut cycle, poised to raise rates depending on how the situation evolves and are going slow, to avoid pinching the growth revival. Read Interest rate futures - a big step ahead Cant judge path of potential rate hikes Exchange Rates • Exports were lower by 28.4% in July in dollar terms, compared to the previous year while imports were lower by 37.1% • Oil imports in the month of July were valued at 55.5% lower than the previous year while non-oil imports fell by 24.5%. • The trade balance for the period April-July 2009 stood at $ 28.913 billion, compared to $ 41.093 billion last year. • FIIs made a net equity investment of $ 1.008 billion in the month of August, compared to the outflow of $ 0.268 billion in August 2008. • The rupee traded in the range of 47.54 to 48.98 to the dollar through the month of August. • Most major currencies have been rising against the dollar recently as the surging US deficits have been a source of concern, while growth, especially in Asia, Germany and France have exceeded expectations. Read Unconventional wisdom Recommendations Demand Curve: The rapidly growing stable markets of southern India FE-Indicus Policy Series: Piped or handpumped Demand Curve:NE India- small, but with great prospects ahead Drought may stall food security act Drought not likely to shrivel India’s growth 39

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Demand Curve: North India geography of growth Paid location-based-services struggle to find favour The numbers are misleading Demand Curve: East India set to make swift progress FE-Indicus Policy series: Why doesn’t Infosys innovate Demand Curve: Rural markets help makers of consumer goods grow steadily 40

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 6th August 2009 Indian Economy Next Quarter Rains still not favouring India’s granary in the northwest, August rains key now Pressure on pulses prices set to ease with imports and higher crop by winter RBI holds rates, but inflationary pressures will force its hand by last quarter Commodity prices set to rise as global growth signs turn more positive High government borrowings pushing bond yields upwards Subdued dollar as emerging economies show more promise this year India : Kal, aaj aur kal As we have been emphasising in the past few newsletters, despite the negative WPI inflation numbers, all is not calm on the inflation front. Right now attention has focused on inflation in food articles and manufactured food products, standing provisionally at 9.7% and 8.5% for the week ending July 25th. Consumer price indices for June are also registering higher inflation than previous months, CPI AL for instance stands at 11.52% inflation; this is on top of the 8.77% rate in June 2008. Clearly, the government’s ‘touchy feely’ talk on being the saviour of the poor has 41

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx been negated by inflation. Could the government have done anything different? We believe it could have and should have. By preferring to reduce emphasis on the consequences of a high fiscal deficit on inflation, the government has done a great disservice to the country. This quarter’s story will be repeated for many quarters to come. Though the focus on price rise will change from product to product over time, there is no doubt that we are heading for higher levels of inflation in general. Right now the story is about pulses, and within that mainly tur. Prices of tur or arhar have risen 45% in the WPI since Jan, other pulses are in double digit rises, except gram. The problem with tur specifically is because last year’s output was 25% lower than the previous year. But tur being a crop that survives when rain is inadequate, going ahead, the high prices and low rain have already raised acreage sown under this crop this year. Import tenders have also been floated, pressures on the prices of tur will therefore lessen by winter. Meanwhile rain is still deficient in the granary of India, but stocks of rice and wheat are high. The problems therefore appear less this year but will aggravate in the year ahead, especially if rains fail the Met prediction in August. As we have said time and again, the time is past for just pushing money in the hands of people, without raising production and productivity levels – If Punjab and Haryana get through this poor monsoon with a halfway decent crop, it will be thanks to the irrigation systems set in years or decades ago. So what can a soft-hearted government do? Economic policy requires hard headedness at its very foundations. Want to give 100 rupees to the poor? Go ahead, but get Rs. 100 productive asset out of it. Want to give more money to government servants? Then get them to deliver that much. And it is possible to do so. A large 42

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx majority of government staff provide services of some type – education, health care, water supply, safety and security, justice, etc. Their output is measurable and it is possible to link salary increases with their output improvements. And all of these have direct productivity benefits for the country. But we hear of no such talk. What is this government scared of? It has no opposition. Issues of inflation, upward pressures on interest rates, weakening currency apart from pressures on the fisc are here to stay for many years to come. The point is we are stuck with higher levels of inflation in the year ahead, the RBI has already raised its estimate to 5% and will need to raise it further still as time goes by; one after the other, more spikes will be seen in some products which might eventually abate, but overall inflationary pressures cannot be wished away. As global growth picks up, prices of commodities will also pick up, thereby impacting the manufacturing sector pricing as well. It is better we are prepared for all of this. Governments internationally had gone in for unbridled spending in the past, hoping that growth will create a pie large enough, but when that did not pan out, the poor and underprivileged had to suffer the most. Soft-heartedness and hard-headedness can go together. Sumita Kale and Laveesh Bhandari 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 showed subdued but better growth in industrial sector in May at 2.7% provisionally, with February’s growth was revised upwards from the initial negative 1.2% to a final positive 0.7%. 43

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Infrastructure sector performed well in June, raising production by 6.5%, as compared to the growth of 5.1% last year – cement, electricity, crude oil and coal outdid their previous year’s growth rates in June. The Markit PMI Survey shows July output levels in the manufacturing sector at similar levels to June, the index stood at 55.3 indicating growth. The new orders index rose to 59.75, the highest level in nine months. The Fourth Advance Estimates for 2008-09 agricultural production puts growth in foodgrain output at 1.3% higher than the previous year, compared to the last estimate that showed negligible increase in output. Wheat production is now estimated higher in 2008-09 by 3%, compared to the previous estimate of a decline by 1%. Pulses output fell by 0.7% as tur took a substantial hit last year, sugarcane fell by 22.1%, cotton by 10.5% and groundnut by 23.4% - putting pressure on prices of these commodities this year. Cement production in June rose by 13.01% while dispatches rose by 12.84%. Media reports indicate that Maruti sales rose by 33.36% in July over the last year, Mahindra and Mahindra reported vehicle sales growth by 22.04% while Honda car sales rose by 11.99%. Rail freight traffic increased by 9.59% in June over the previous year, higher than the 7.81% growth clocked in June 2008. Data from Airports Authority India shows that international passenger air traffic to India has picked up, rising by 3.9% in May over last year, while domestic passenger air traffic has continued its decline by 5.9% over last May. Domestic freight however has risen by 3.5% in May over the previous year, while bad export markets continue to dog international freight, which declined by 4.3% in May 2009. 44

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Hiring in companies increased in June, over the previous month, according to the Naukri Jobspeak Index, which began conducting the survey in July 2008. Rains in July increased the water levels in the 81 storage reservoirs monitored by the CWC, however, storage levels are still less, at 78% of the 10 year average. Except for tur dal, maize and cotton, most crops are reported lower acreage sown so far, bringing the total kharif acreage sown by 24th July to 7.9% less than the area sown the previous year. Read:Bullish on China, India: Nouriel Roubini Inflation Provisional WPI estimates put inflation for the week ending July 25th at a negative 1.58%. However significant upward revisions have raised May inflation estimates by one percentage point. In June consumer price inflation rose, with the CPI AL recording 11.52% yoy and CPI IW at 9.29%. NCDEXAGRI index of spot prices of agricultural commodities has risen by 8.35% over the period 11th July-1st August. Prices of tur and sugar have been rising over the past six months on lower production last year. International crude oil prices climbed down to touch $58.25 a barrel on July 13th, but have since risen in the range of 65-70 by the end of July, on positive global economic data. Read: When will tur dal touch Rs. 100/kg? Read: Anxiety over food inflation Interest Rates 45

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The 10 year benchmark gilt touched a low of 6.7978% on July 17th but rose again to 6.9691% on July 31st. While the RBI kept rates unchanged in its July end Credit Review and signalled intention to maintain an accommodative stance in liquidity, there was emphasis on the need to begin withdrawing the looser credit policy, in tandem with the government fiscal stance. Rates therefore are seen to edge upwards by the end of the fiscal, if growth and inflation estimates move higher. High government borrowing, higher oil prices and a build up in inflation will put an upward pressure on bond yields. Read: Global Financial Crisis- Questioning the questions Read: Bank Chiefs should tell Alistair Darling to stop meddling Read: Bernanke broke rules, Paulson fumbled, Fed managed great panic Exchange Rates Exports in the month of June were 27.7% lower than the previous year in dollar terms and 19.4% lower in rupee terms, while imports fell by 29.3% in dollar terms and 21.2% in rupee terms. Oil imports were 50.6% less in June compared to the previous year, while non-oil imports fell by 16.5% on account of slower growth this year. Trade deficit for the period April-June 2009 stood at $15.5 billion, lower than the $28.6 billion last year, on account of lower imports. Forex reserves which had been falling due to capital outflows with the global crisis have now an upward trend since April, rising to $ 267.71 billion as on July 24th. This is higher by $15.73 billion compared to March end and lower by $38.89 billion over last July. The dollar traded at its lowest against the pound and the euro this year, on better than expected economic news from Europe. 46

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The rupee ranged between 48 and 49.5 to a dollar during July, as upward pressure has been curtailed by the RBI and a subdued dollar. Read: Dr. Subbarao as Tiger 47

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 48

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 3rd July 2009 Indian Economy Next Quarter Delayed monsoon spreads rapidly, MET deptt. hopes it will hold-up. Late monsoon and heat wave in June hits sowing for rice, oilseeds and pulses – expect pressure on prices. Growth heading upwards, monsoon and the US economy could still be spoilers. Government shows intention of reforms – implementation and governance issues remain stumbling blocks. Disinvestment is on the cards finally. Fuel price hike with no debate augurs well for deregulation. India : Kal, aaj aur kal The world is upbeat about India again. We are to be the fastest growing economy in 2010 at 8%, says the World Bank. So we finally get to beat China at the race, never mind that China is way ahead of us in per capita income and development indicators. In fact, this year, India is projected to be the only major economy to show a positive growth (2%) in steel consumption, according to the World Steel Association. The Economic Survey 2008-09 also sees growth in the 6.5-7.5% range this year, assuming a normal monsoon 49

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx and a bottoming out of US recession by September. This is in line with our growth estimate of 6.6% given a few months earlier. Returning to the high growth path of recent years however needs significant reforms, says the Survey and presents a formidable wish-list of measures. Suffice to say, this hope will not materialise in the near future. But talk aside, inability to deal with upcoming risks is a serious failing of our policymakers. We had predicted, in our May newsletter, that crude would move away from the $ 40-50 range of the previous months into a higher range of $60-70, as expectations of global recovery became stronger. Crude did trade in this predicted range in the month of June. While we are glad that the fuel price hike took place this time with less fuss and without countless EGoM meetings, the fact remains that this hike does not cover the increase in petro costs fully. This is just one of several sectors that require more efficient utilisation of public and private resources through free pricing combined with vouchers/entitlements to the deserving households for kerosene and gas. The Budget needs to focus on these issues as much as it does on taxation and government investment. Our overall take on the forthcoming budget is that Pranab Mukherjee will not go in for another fiscal stimulus, but will aim to contain the deficit to 6% or below. There will be announcements of a new scheme or two, but their full implementation will be staggered over a few years (e.g. Food Security Act), ditto expansion of the social sector plans already in motion. Some tweaking on taxes aside, we think it would be too much to expect much beyond the usual from this Budget. Sumita Kale and Laveesh Bhandari 50

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 April posted a positive growth of 1.4% over last year, while there were significant upward revisions in previous months estimates. March growth was revised from –2.3% to –0.8% and there is still one more revision to go for the final number for March. January IIP growth was revised to a final positive 1.0% from its first estimate of negative 0.5%. Infrastructure sectors showed a subdued growth of 2.8% in May compared to 3.1% last year. Good performance from coal(10.2%) and cement (11.6%) boosted the index, while crude oil and petroleum refinery products declined by 4.3% each. The Markit PMI survey showed a slight decline in the manufacturing output index in June, but still at 55.34 was above the threshold of 50 that separates expansion from contraction. Provisional estimates of electricity generation for the month of June show growth at 8.11%, compared to 2.55% last year. Media reports good auto sales with Maruti and Hero Honda leading the growth as before with 22.5% and 23.7% respectively. However, in June others like Yamaha, Hyundai, Tata and Fiat reported positive growth in sales. During May, revenue earning freight traffic carried by the Railways increased by 2.54% over last year. Revenue earnings rose by 2.34% in the period April-May over the same period last year, while Net Tonne Kilometres rose by 3.61% during April-May. Telecom subscribers increased by 11.44 million in May, bringing tele-density to 38.88% in the country. 51

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Hiring according to the Naukri Jobspeak was lower in May than in April, the index standing at 644 compared to 677 the previous month. Delayed rains and heat have hit sowing for oilseeds and pulses. Groundnut acreage sown was down 54.8% as on June 19th, compared to last year, while Moong was down 35.2%. Water level in reservoirs fell below the 10 year average in March and reached alarming levels by June with lack of rain. 11 reservoirs, primarily in Maharashtra and Karnataka have no live storage. Read:India’s growth engine gathers greater steam Read:Two exceptions Inflation While provisional WPI inflation fell in the negative zone in June, this was essentially due to the high base effect of last June, when the fuel prices had been hiked in the first week. While upward revisions to the WPI estimates began for February estimates, inflation for week ending 18th April was revised from 0.57% to 1.62% while inflation for week ending 24th April was revised from 0.7% to 1.75%. Consumer price indices also registered an upswing for May – CPI AL rose sharply by 7 points over April, bringing inflation to 10.21% while CPI IW went up marginally to register 8.63% inflation. With crude oil prices moving into the 60+ range in June, even touching $ 70 a barrel, domestic petrol and diesel prices were raised from July 2 by Rs 4 and Rs 2 respectively. The Centre raised the statutory minimum price for sugarcane by 32% in the end of June, this should reflect in higher prices of sugar at the wholesale and retail level. FAO Food Price Index has fallen one third since last June peak but oilseeds and sugar markets remain tight as 52

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx production setbacks have raised prices since last November. Read: Certainly not deflation Read: Commodity bubble would spark inflation: Assocham Interest Rates 10 year benchmark gilt yields have been rising since the end of April as the pressure of higher borrowings impacted the market. Government borrowing increased from the planned Rs. 241,000 crore for H1 2009-10, to Rs. 259,000 crore. Going forward, the Budget on July 6th will determine trends as the exact size of disinvestments and borrowings for the year will be set out. On the interest rate front, the RBI has been caught by mixed signals coming in on the inflation and growth front - CPI still registering high inflation, WPI showing low levels but an uptrend, manufacturing off the negative path but slow growth forecast ahead. A rate cut by the RBI of 25-50 basis points in the July end review could well signal the end to the rate cut cycle. Read: RBI says reduction in interest rates a complex issue Read: Government may borrow Rs. 40k crore more in FY10 Exchange Rates Exports fell by 29.2% in May compared to last year (18.4% in Rupee terms), while imports fell by 39.2% in dollar terms(30% in Rupee terms). Oil imports were lower by 60.6% while non-oil imports also registered a decline of 25.4% in May, reflected the slowdown in the economy. Trade deficit for April-May period was estimated at $ 10.2 billion, compared to $ 19.8 billion for the same period last year. 53

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx With decline in imports, the current account deficit moved into surplus in the Jan-Mar quarter of this year, but stood at $29.82 billion for 2008-09, 2.6% of GDP, compared to $17.03 billion (1.5% of GDP) the previous year. Balance of Payments situation improved in the Jan-Mar quarter to show a small surplus of $ 300 million, compared to the $17.88 billion deficit in the previous quarter. Total external debt stood at 2 229.9 million at the end of March, compared to $230.85 billion at the end of December. Foreign portfolio investment has been flowing back since mid-March, which has pushed the value of the rupee up. It is now trading at 47.72 to a dollar, compared to the low of 52.2 in early March. Read: BRIC ambition to form a new world order Read: Change the US can believe in 54

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 3rd June 2009 Highlights • Economic slump has bottomed out – expect slow recovery ahead • 2009-10 growth forecasts will be revised upwards by most as the year progresses • Expectations of global growth resurgence fuels commodities and crude prices • Dollar dives, rupee surges to 47 - more trouble for exporters ahead • Fuel price deregulation on the cards • But all is not well – and overheated stock markets need to cool a bit India: Kal, aaj aur kal The numbers all seem to be looking up, the stock markets all seem to be rising once again, and cheer is back. There is spring in the air. One wonders what happened suddenly to make everything so nice. Anyhow, things as predicted are improving – largely because of heavy government interventions internationally. The lower interest rates in India are also starting to have their 56

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx impact – this was all predicted, as interest rate reductions take some time to play out. But what is also predicted is that things will take a few months more to stabilise - we estimate growth for this financial year to be an unexciting 6.6%. Meanwhile companies in many sectors will continue to be cash starved, jobs will be lost, new hiring will remain low. So while things will get better, don’t expect too much. The trouble is that the situation was so bleak a quarter ago that any small improvement has a big impact on our collective psyche. The financial market types have just not learnt anything – over-reacting is built in their DNA. Let’s hope another bubble is not created. At the same time everyone – including economists – is blaming economists for not predicting the fall. But we know of at-least ten well known economic thinkers who were writing that something was going very wrong, these ‘good times’ were heading for a crash. Swami Aiyar of ET, was actually week after week, increasing his probability of crash figures. No one wanted to listen to them then. And now again, no one seems to listen when anyone who has any sense is pointing out an impending crisis - governments should not spend this much – we are creating a bigger problem than we tried to solve. Hopefully the new UPA government will be a bit more conservative than the last one. The Budget should reflect on the need to get back to some revised form of FRBM, ideally with a roadmap. With growth looking up, it is time for the government to begin to step back. What worries us is the volatility in prices – whether in crude, forex, commodities, grain etc. – the rupee which had fallen below 52 to a dollar in early March has now 57

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx swung up past 47 to a dollar on 1st June. Crude which had fallen to a low of $ 35 a barrel in December is now trading close to $70. In May, the Reuters- Jefferies CRB Commodities index rose 14%, its highest monthly gain since 1974. Firms, governments and consumers must keep themselves aware of the ‘surprises’ that the markets can continue to throw at them, given that there are still many unresolved issues lurking in the global economy. In short, the financial and commodities markets are still not working in a sane manner nationally and internationally; don’t listen to the people who man them. Don’t listen to the corporate bigwigs. Don’t listen to the, yes, economists who say things are back on track. And don’t listen to any government that says they have it all under control. India will at the very least face two pressures in the coming quarters and years – on the price and forex rate fronts. And high deficits will not help. But we have a good team running the show. We wish the new government good luck in the months and years ahead. We have high expectations from them. PS. Please visit our new homepage for interactive time series graphs of economic indicators http://www.indicus.net/ Sumita Kale and Laveesh Bhandari 3rd June 2009, Indicus Analytics 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. 58

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Economic Growth • GDP for 2008-09Q4 comes in at 5.8% with full year growth at 6.7%, revised down from January estimate of 7.1%. • Q3 numbers were revised upwards from 5.3% to 5.8% growth as agricultural numbers were stronger, as were community, defence and public services growth. • The Markit PMI survey of 500 firms (earlier known as the ABN-AMRO NTC survey) showed resurgence in May in manufacturing activity, with the index at 55.7 in May compared to 53.3 in April. More importantly, the new orders index rose to 59.9, the highest since September. • IIP numbers for March showed a steep decline by 2.3% from last March, even as provisional estimates for December and February were both revised upwards. • December IIP growth had been first set at a negative 2%, now revised to a final minus 0.2%. • April saw higher growth for cement production at 12.32% and sales at 13.03% exceeded March growth estimates of 10.43% and 10.35% respectively. • Maruti and Hero Honda continue their winning streak with double digit growth in May with 10% and 23% growth respectively as their rural market focus paid off. Other manufacturers, including BMW are now relooking strategy in smaller towns to boost sales. • Telecom added 11.09 million subscribers in the wireless network, bringing teledensity to 37.94. • Recovery in the Baltic Dry Index , which measures the shipping freight costs for commodities. This index had hit an all-time high of 11,793 on May 20 2008, and breached a 22 year low of 663 in 59

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx December. It has now crossed the 3,000 mark for the first time since October. • Boosted by coal(13.2%), cement (11.2%) and electricity(6.0%), April IIP for infrastructure industries grew by 4.3%, compared to 2.3% last April. Steel showed positive growth of 1.6% over last April, when it had declined by 0.6%. • Rail freight traffic increased by 3.05% in April over the last year. • Air passenger traffic going through a slump – domestic passenger traffic fell by 15.4% in March, while international passenger traffic fell by just 1.8%. In air cargo, international freight has fallen harder at 5.5% in March, while domestic cargo has dropped by 2.4% over last March. • Naukri Jobspeak index on hiring fell again in April, though April and May are usually low hiring months. The index is down 32% from its July levels. This index began in July 2008, there are no year on year growth numbers. Read Shipping rates ride out the storm http://www.business-standard.com/india/news/shipping- firms-ride-outstorm/359726/ India’s 2009-10 growth forecasts to 7% http://www.livemint.com/2009/06/01114926/India8217s- 200910-growth-f.html?h=E 60

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Inflation • While provisional WPI inflation has remained low averaging 0.4% in April and May so far, it is the upward revisions for March data that point to inflationary pressures in the system. • CPI numbers finally released put inflation lower than previous months for CPI AL at 9.09% in April. • April CPI IW however stands at 150, a rise from the level of 148 which it had held since October (except a dip to 147 in December). Inflation for April therefore is 8.70%. • Crude oil has surged back again sharply to cross $65 a barrel and China has raised prices by 6-7%. • NCDEXAGRI index shows a decline over the month of May in spot prices of 20 agricultural commodities. On 29th May, the index was higher by 7.2% than last year. Read BBC World Service Food Price Index http://news.bbc.co.uk/2/hi/business/8059560.stm China raises prices 6% to7% on gasoline, diesel fuel http://online.wsj.com/article/SB1243810342310 70303.html A little hope a dangerous thing for commodities http://www.reuters.com/article/ousiv/idUSTRE5512582 0090602 61

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Interest Rates • Yield on the 10 year benchmark gilt trended slightly upwards at the end of May, touching 6.6941% on 29th May. • With large government borrowings in the offing this year and no official borrowing schedule out as yet, yields are expected to harden slightly, even as there is pressure on the RBI to cut rates further given the low growth and inflation numbers. • While corporates are asking for a 400-600 basis point cut in lending rates, bankers are reluctant to cut more than 50-100 basis points. (Read interview with Dr. Mohan below for views on bank compulsions.) • Even though inflation numbers are low world over, policy rate have now more or less reached stable levels – Australia kept the rate unchanged at 3%, South Korea, Thailand are seen as done with their rate cuts, Bank of England is expected to hold rates at the low of 0.5%. Read Interviews with Rakesh Mohan http://www.livemint.com/2009/05/27173009/Government -has-space-for-more.html http://www.business-standard.com/india/news/weve- handled-crisis-much-better-than-anyone-else- inworld/359685/ Federal Reserve puzzled by yield curve steepening http://www.reuters.com/article/wtUSInvestingNews/idUST RE54U1NZ20090531 Factbox: Global Interest Rates 2009 62

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx http://www.reuters.com/article/usDollarRpt/idUSGLOBAL2 0090601 Exchange Rates • Exports in April were valued at 33.2% lower in dollar terms than April 2008 (16.4% in rupee terms), while imports fell by 36.6% in dollar terms and 20.6% in rupee terms. • Oil imports at $ 3.6 billion in April 09 were 58.5% lower than April 08, while non-oil imports at $12.1 billion were 24.6% lower than previous April. • This brings the trade deficit interestingly, lower at $5.004 billion in April 09 compared to $8.75 billion in April 08. • FII net inflows rose from $ 1300.70 million in April to $ 4144.80 million in May. • As capital inflows continued into emerging economies, with better news from Asia, the rupee surged up from its 50.22 to a dollar at the end of April to 47.29 at the end of May. Read ECB’s Constancio sees no accelerated dollar fall Recommended People in large cities earn more but save much less The other imbalance The economics of chota recharge Why some cities are getting younger and why some are not 63

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx India is witnessing a durables revolution Beyond the fields Are speculators evil? How cities define the size of households 64

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 3rd June 2009 Highlights • Economic slump has bottomed out – expect slow recovery ahead • 2009-10 growth forecasts will be revised upwards by most as the year progresses • Expectations of global growth resurgence fuels commodities and crude prices • Dollar dives, rupee surges to 47 - more trouble for exporters ahead • Fuel price deregulation on the cards • But all is not well – and overheated stock markets need to cool a bit India: Kal, aaj aur kal The numbers all seem to be looking up, the stock markets all seem to be rising once again, and cheer is back. There is spring in the air. One wonders what happened suddenly to make everything so nice. Anyhow, things as predicted are improving – largely because of heavy government interventions internationally. The lower interest rates in India are also starting to have their 66

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx impact – this was all predicted, as interest rate reductions take some time to play out. But what is also predicted is that things will take a few months more to stabilise - we estimate growth for this financial year to be an unexciting 6.6%. Meanwhile companies in many sectors will continue to be cash starved, jobs will be lost, new hiring will remain low. So while things will get better, don’t expect too much. The trouble is that the situation was so bleak a quarter ago that any small improvement has a big impact on our collective psyche. The financial market types have just not learnt anything – over-reacting is built in their DNA. Let’s hope another bubble is not created. At the same time everyone – including economists – is blaming economists for not predicting the fall. But we know of at-least ten well known economic thinkers who were writing that something was going very wrong, these ‘good times’ were heading for a crash. Swami Aiyar of ET, was actually week after week, increasing his probability of crash figures. No one wanted to listen to them then. And now again, no one seems to listen when anyone who has any sense is pointing out an impending crisis - governments should not spend this much – we are creating a bigger problem than we tried to solve. Hopefully the new UPA government will be a bit more conservative than the last one. The Budget should reflect on the need to get back to some revised form of FRBM, ideally with a roadmap. With growth looking up, it is time for the government to begin to step back. What worries us is the volatility in prices – whether in crude, forex, commodities, grain etc. – the rupee which had fallen below 52 to a dollar in early March has now 67

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx swung up past 47 to a dollar on 1st June. Crude which had fallen to a low of $ 35 a barrel in December is now trading close to $70. In May, the Reuters- Jefferies CRB Commodities index rose 14%, its highest monthly gain since 1974. Firms, governments and consumers must keep themselves aware of the ‘surprises’ that the markets can continue to throw at them, given that there are still many unresolved issues lurking in the global economy. In short, the financial and commodities markets are still not working in a sane manner nationally and internationally; don’t listen to the people who man them. Don’t listen to the corporate bigwigs. Don’t listen to the, yes, economists who say things are back on track. And don’t listen to any government that says they have it all under control. India will at the very least face two pressures in the coming quarters and years – on the price and forex rate fronts. And high deficits will not help. But we have a good team running the show. We wish the new government good luck in the months and years ahead. We have high expectations from them. PS. Please visit our new homepage for interactive time series graphs of economic indicators http://www.indicus.net/ Sumita Kale and Laveesh Bhandari 3rd June 2009, Indicus Analytics 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. 68

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Economic Growth • GDP for 2008-09Q4 comes in at 5.8% with full year growth at 6.7%, revised down from January estimate of 7.1%. • Q3 numbers were revised upwards from 5.3% to 5.8% growth as agricultural numbers were stronger, as were community, defence and public services growth. • The Markit PMI survey of 500 firms (earlier known as the ABN-AMRO NTC survey) showed resurgence in May in manufacturing activity, with the index at 55.7 in May compared to 53.3 in April. More importantly, the new orders index rose to 59.9, the highest since September. • IIP numbers for March showed a steep decline by 2.3% from last March, even as provisional estimates for December and February were both revised upwards. • December IIP growth had been first set at a negative 2%, now revised to a final minus 0.2%. • April saw higher growth for cement production at 12.32% and sales at 13.03% exceeded March growth estimates of 10.43% and 10.35% respectively. • Maruti and Hero Honda continue their winning streak with double digit growth in May with 10% and 23% growth respectively as their rural market focus paid off. Other manufacturers, including BMW are now relooking strategy in smaller towns to boost sales. • Telecom added 11.09 million subscribers in the wireless network, bringing teledensity to 37.94. • Recovery in the Baltic Dry Index , which measures the shipping freight costs for commodities. This index had hit an all-time high of 11,793 on May 20 2008, and breached a 22 year low of 663 in 69

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx December. It has now crossed the 3,000 mark for the first time since October. • Boosted by coal(13.2%), cement (11.2%) and electricity(6.0%), April IIP for infrastructure industries grew by 4.3%, compared to 2.3% last April. Steel showed positive growth of 1.6% over last April, when it had declined by 0.6%. • Rail freight traffic increased by 3.05% in April over the last year. • Air passenger traffic going through a slump – domestic passenger traffic fell by 15.4% in March, while international passenger traffic fell by just 1.8%. In air cargo, international freight has fallen harder at 5.5% in March, while domestic cargo has dropped by 2.4% over last March. • Naukri Jobspeak index on hiring fell again in April, though April and May are usually low hiring months. The index is down 32% from its July levels. This index began in July 2008, there are no year on year growth numbers. Read Shipping rates ride out the storm http://www.business-standard.com/india/news/shipping- firms-ride-outstorm/359726/ India’s 2009-10 growth forecasts to 7% http://www.livemint.com/2009/06/01114926/India8217s- 200910-growth-f.html?h=E 70

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Inflation • While provisional WPI inflation has remained low averaging 0.4% in April and May so far, it is the upward revisions for March data that point to inflationary pressures in the system. • CPI numbers finally released put inflation lower than previous months for CPI AL at 9.09% in April. • April CPI IW however stands at 150, a rise from the level of 148 which it had held since October (except a dip to 147 in December). Inflation for April therefore is 8.70%. • Crude oil has surged back again sharply to cross $65 a barrel and China has raised prices by 6-7%. • NCDEXAGRI index shows a decline over the month of May in spot prices of 20 agricultural commodities. On 29th May, the index was higher by 7.2% than last year. Read BBC World Service Food Price Index http://news.bbc.co.uk/2/hi/business/8059560.stm China raises prices 6% to7% on gasoline, diesel fuel http://online.wsj.com/article/SB1243810342310 70303.html A little hope a dangerous thing for commodities http://www.reuters.com/article/ousiv/idUSTRE5512582 0090602 71

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Interest Rates • Yield on the 10 year benchmark gilt trended slightly upwards at the end of May, touching 6.6941% on 29th May. • With large government borrowings in the offing this year and no official borrowing schedule out as yet, yields are expected to harden slightly, even as there is pressure on the RBI to cut rates further given the low growth and inflation numbers. • While corporates are asking for a 400-600 basis point cut in lending rates, bankers are reluctant to cut more than 50-100 basis points. (Read interview with Dr. Mohan below for views on bank compulsions.) • Even though inflation numbers are low world over, policy rate have now more or less reached stable levels – Australia kept the rate unchanged at 3%, South Korea, Thailand are seen as done with their rate cuts, Bank of England is expected to hold rates at the low of 0.5%. Read Interviews with Rakesh Mohan http://www.livemint.com/2009/05/27173009/Government -has-space-for-more.html http://www.business-standard.com/india/news/weve- handled-crisis-much-better-than-anyone-else- inworld/359685/ Federal Reserve puzzled by yield curve steepening http://www.reuters.com/article/wtUSInvestingNews/idUST RE54U1NZ20090531 Factbox: Global Interest Rates 2009 72

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx http://www.reuters.com/article/usDollarRpt/idUSGLOBAL2 0090601 Exchange Rates • Exports in April were valued at 33.2% lower in dollar terms than April 2008 (16.4% in rupee terms), while imports fell by 36.6% in dollar terms and 20.6% in rupee terms. • Oil imports at $ 3.6 billion in April 09 were 58.5% lower than April 08, while non-oil imports at $12.1 billion were 24.6% lower than previous April. • This brings the trade deficit interestingly, lower at $5.004 billion in April 09 compared to $8.75 billion in April 08. • FII net inflows rose from $ 1300.70 million in April to $ 4144.80 million in May. • As capital inflows continued into emerging economies, with better news from Asia, the rupee surged up from its 50.22 to a dollar at the end of April to 47.29 at the end of May. Read ECB’s Constancio sees no accelerated dollar fall Recommended People in large cities earn more but save much less The other imbalance The economics of chota recharge Why some cities are getting younger and why some are not 73

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx India is witnessing a durables revolution Beyond the fields Are speculators evil? How cities define the size of households 74

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 8th May 2009 Highlights • As last newsletter predicted, manufacturing recovery has begun. • Yet, exports will continue to stay depressed, SMEs will take a while to feel the positive swing. • Prospects for emerging economies brighten, capital flows in. • Inflows are notoriously fickle, so watch out for any turnaround if political factors disappoint. India: Kal, aaj aur kal The numbers are coming in clearer every month as Indian manufacturing recovers, thanks to strong domestic demand, due in large part to money from the pay commission, NREGS, high support prices for agri products last year etc. The fiscal stimulus began much before the global crisis hit India. We are not in anyway close to double digit growth, but the slump does seem to be over. Meanwhile, the stock market believes that all is well with the world, which isn’t true, of course, and if the election outcome disappoints in a fractured mandate, expect a rude shock once again. The main problem however will come up later this year, or may even surface next year when the high fiscal deficit 76

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx will combine with rising demand to raise inflation levels substantially. Even now, the WPI which had been forecast by many to hit negative numbers, is still reluctant to oblige; even with the high base effect, large positive week on week rises have kept the WPI inflation in the positive zone. The new CPI indices are due to come into force from next year, while the current data for March has not been released yet, which is another issue altogether. Worldwide, as prices reflect the expectations of demand, we can expect higher levels in basic commodities like crude, copper, steel etc. as news of recovery in emerging economies impacts these markets. Again, we caution that this does not mean a hike into levels above $100 a barrel for crude, for instance, but the range of $40-50 of the past 3 months will move to higher levels of $60-70, consumers, the government and the firms must be prepared for this. The Election Commission has had its hands full this past month and we will be extremely grateful when the code of conduct is lifted and life can go back to normal. EC permission is needed for a range of items: bus fare cuts in Tamil Nadu, relaxation in import duty on sugar..and now the release of consumer price index numbers. In the case of the CPI, the electorate already has a better idea about the inflation affecting their consumption baskets, regardless of what the government data may be saying. It is only analysts who are interested in the numbers and even they look at these numbers with scepticism. Yet, the EC’s code of conduct actually goes to indicate how much of government influence continues in our lives and how much more liberalisation is needed. We have always been of the opinion that cash vouchers are a much better, equitable method of reducing the burden on the poor, rather than price determination by the government. 77

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The EC should actually also rename all government programmes, airports, ports etc, that are associated with political parties, that would be a service to the electorate! Sumita Kale and Laveesh Bhandari 6th May 2009, Indicus Analytics 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 contracted again in February with a negative 1.2% growth, though January numbers are now revised from negative to positive territory with growth of 0.4%, numbers still to undergo final revision. • Manufacturing fell by 1.4% in February, over last year’s growth of 9.6%. • Cement production grew by 10.43% in March while sales grew by 10.35%. • The six core sectors grew at 2.9% in March, the same rate as March 2008, with cement, electricity and petroleum refineries doing better than before. • ABN AMRO’s PMI survey shows expansion in industrial activity in April, at 53.3 it stands much above the trough of 44.2 in December. Bulk of the boost came from domestic demand. • Electricity generation in April showed good growth of 6.01% over last year, producing 2.67% more than the planned generation for the month. 78

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • However, ABN AMRO survey showed that power cuts had held up production schedules in many cases in the same month. • Maruti, Hyundai etc. show positive growth in sales in April over last year, though far from double digit numbers. • Hero Honda continues to defy trend with 29.5% growth in April. • 15.64 million subscribers added on in March as part of the telecom growth story, teledensity reaches 36.98%, while broadband subscribers cross 6 million. • Air passenger traffic fell 3.1% for international traffic and 8.9% for domestic traffic, while total cargo declined by 11.3% in February 2009 over the past year. • Uneven weather is expected to hit wheat output in states like Punjab, bringing down the production estimates by 10-20%. • Hiring according to the Naukri JobSpeak fell in March, compared to the February index, a sign that companies were still in the process of consolidation. Read Emerging giants offer hope economy turning http://www.guardian.co.uk/business/feedarticle/8488079 Land grab, the race for the world’s farmland http://www.independent.co.uk/news/business/analysis- and-features/land-grab-the-race-for-the-worlds- farmland-1677852.html Inflation 79

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Inflation measured by the Wholesale Price Index which, some were expecting to go into negative zone by March, has actually been on the uptrend, with large positive seen week on week changes in April. • Provisional WPI inflation rose to 0.57% for the week ending April 18th, while final numbers for February continued their downward revision. • Consumer price indices for March are not available as the Election Commission has reportedly prevented the release. • Crude oil has moved up significantly from the lows in December and hovers around $50 a barrel now. • Spike in crude oil, copper etc, cannot be ruled out going ahead as signs of recovery in China, India and Russia raise expectations of demand once again. Read Election code prevents release of CPI numbers http://news.in.msn.com/business/article.aspx?cp- documentid=3005655 New Consumer Price Index likely by August 2010 http://economictimes.indiatimes.com/News/Eco nomy/New-consumer-price-index-likely-by- August-2010/articleshow/4478706.cms Interest Rates • Yield on the 10 year benchmark gilt settled lower to average 6.46% in April, compared to the average of 6.63% the previous month. 80

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Banks reduced their PLRs and loan rates, in accordance with the lower rate regime signalled by the RBI. • Government borrowings are expected to be even higher than budgeted once the new government sets the agenda for the year ahead. • Ways and Means Advances to the government from the RBI have exceeded Rs. 40,000 crore, double the limit of Rs. 20,000 crores as election expenses and earlier sops are financed. • After the spate of rate cuts around the globe, now countries are going at different speeds depending on domestic factors – Australia has kept rates on hold, South Africa may have hit its floor as well, Brazil expects to slow down pace of cuts, ECB is expected to give its last rate cut in May. Read Are gilt funds losing their shine? http://www.livemint.com/2009/04/26230413/Are-gilt- funds-losing-their-sh.html?h=B Reserve Bank Australia keeps rates on hold http://www.news.com.au/business/money/story/0,28323, 25432700-5016110,00.html Exchange Rates • Exports dropped the highest ever by 33.3% in March over the previous year in dollar terms, and 15.3% in rupee terms. Imports fell by 34.0% in dollar terms and 16.2% in rupee terms. • Trade deficit for 2008-09 has provisionally been set at $119 billion, compared to $88.4 billion in 2007-08. 81

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Capital inflows resume - $1.3 billion in equity in April, making the rupee rise. • Forex reserves that had fallen steadily from its peak of $ 316 billion in May have stabilised since November, and on 24th April stood at $ 253 billion. • External Commercial Borrowings dropped by 42% in 2008-09 as the global financial sector reeled. About 500 companies raised $18.38 billion compared to 625 firms the previous year sourcing $30.94 billion. • The rupee which had dropped significantly to the low of Rs. 52.06 to a dollar in early March has now rebounded to around 50 levels again as capital inflows boosted the value. Read Asian currencies climb as funds return http://www.bloomberg.com/apps/news? pid=20601087&sid=aD_8M2vH0GDI&refer=home 82

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 8th April 2009 Highlights • The economy has bottomed in India and internationally • Expect a very slow turnaround from now but numbers look bad till Q3 ‘09 • Manufacturing recovery in India commences • Stock markets rally as if worst is over – but too bullish for our liking • G20 meet says the right things, adds value to the IMF • Inflation under wholesale prices falls dramatically; consumer price inflation to follow in coming months • Rural markets holding up so far in India, need support from weather going forward. India: Kal, aaj aur kal India was taken back by shock last September, as it was hit by the global crisis and events proved the decoupling hypothesis wrong. While the pendulum swung immediately in the other direction and capital pulled out, exports shrunk, the capital account went into a deficit for the first time since 1998-99, just about as suddenly, the situation appears to be changing. Words like ‘green shoots’, ‘end of fear’, etc. have begun to come back on 84

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx the scene even as manufacturers begin to look less shell- shocked as before, the stock market rallies and the rupee gains strength. Some hard numbers to support this reversal in sentiment - the JP Morgan Global PMI indices(reference given below), show that Indian manufacturing has contracted the least and has swung back the fastest to touch a 49.5 index in March. Of course, it will take another few months to show a clear trend but the bottoming off seems to have happened. This only supports our assertion that low or falling prices after a bubble are a signal of rationally functioning markets and therefore good for the economy. This of course does not in any way mean that all production numbers will just as suddenly turn positive or double digit – they will still look bleak for another quarter or so. What has happened is that just as a while back, things were looking worse than expected, now they are looking better than the worst. It is all relative of course, but the fear pychosis seems to have gone. There are still so many problems to overcome – the fiscal deficit is just one of them. Borrowings are slated to go up even further, and though the RBI Governor has asked markets not to be ‘unduly worried’, it is difficult to see how markets can take this in their stride serenely. While some banks have reduced their rates and it looks now like an all out public vs private sector bank fight on this one, the RBI rate cuts are not being passed on sufficiently. This, by the way, is not a problem unique to India and its banking system - Australia, Indonesia, Israel all report reluctance from the banking system to pass on the cuts. Credit growth has also significantly reduced as the economy slumped, and this has hit firms very hard. Risk aversion is of higher priority in bank portfolios now, the days of easy credit are over, companies need to realign 85

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx their plans in these new conditions – the period of ‘painful adjustment’ is on. And for some, specially the small and medium sector, and more so those that were expanding aggressively, there will be very painful times ahead. The launch of the world’s cheapest car brought the Tatas and India back into the spotlight worldwide but also triggered off sharp debates: prospective traffic congestion alarms some while others are thrilled and wonder why cars should be just the privilege of the rich. The larger point actually is better mass public transport and urban planning. Here actually the government scheme to buy buses under the JNNURM must be lauded, we wish there were more such initiatives under the fiscal stimulus packages. Other main issues that never seem to get resolved are infrastructure, education and healthcare..all sectors that constrain growth in our country. Remains to be seen whether the next government can move things along a fast track. P.S. We have started a blog with contributions from Indicus and guest authors too, do join us at www.indicus.net/blog Sumita Kale and Laveesh Bhandari 8th April 2009, Indicus Analytics 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. 86

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Economic Growth • IIP shows negative growth for second month in succession, -0.5% in January 09, with manufacturing showing growth at a negative 0.8%. • More interestingly, the IIP for December showed an upward revision of almost 2 percentage points with growth moving from the provisional –2.0% to –0.6%. The final figure will be released after another month, though. • Electricity generation shows a big boost in March, growing provisionaly at 5.87%, compared to the 3.64% last March, though this is still about 7% less than the targeted generation. • Cement production grew by 8.6% while sales grew by 8.7% in February. • Auto sales did well again in March, M&M reported 11.3% growth in domestic sales though exports slumped, Maruti’s Alto did its highest ever sales, crossing the 20,000 mark for the 11th time, a record for any car in India. • Telecom continued its high performance, adding 13.42 million wireless subscribers in February, taking tele-density to 35.65% in India. • Air passenger traffic fell by 11% while freight fell by 8.2% in January 2009. • Ports handled 2.13% more container cargo in 2008-9, the busiest port JNPT had volume falling by 11% in the same year. • Rail freight earnings rise 12.02% in April- February period, continues decline in February. • Water in 81 major reservoirs have dipped to less than last 10 years average levels, with scanty or deficient rainfall till mid- March and higher than temperatures, the water situation 87

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx needs to be monitored carefully. As yet, no alarm to be sounded on the agri front. • FAO indicates global cereal production will not match last years record. Prolonged dry weather impacting crops in Asia and South America. Read JP Morgan March Global PMI Report shows slightly slowing contraction Turning around cautiously Wall street trades Zegna for denim, tool belts Inflation • Wholesale Price Index inflation crashes to less than 1% in March provisionally, even though there is the index has risen in the last two reported weeks for March. • Revisions to January data continue to be downward: last March revisions were to the order of almost 2 percentage points in inflation.Upward revisions confirm inflationary pressures in the economy. • Consumer Price Indices have high inflation numbers, CPI IW at 9. 63% and CPI AL at 10.79% for February. • Crude oil prices have been on an uptrend since December lows of less than $35 a barrel. The steep crash since July has been stopped, it appears that this is the bottoming out of the crude 88

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx market – March levels ranged between 42 and 51 dollars a barrel. • Sugar prices have remained high in India, up 30% since October 08, even as government allows sugar mills to import raw sugar at zero duty till September, but had not allowed imports of refined sugar at zero duty yet. Read Asymmetry in commodity prices Interest Rates • With the highest even government borrowing up ahead, 10 year benchmark Gsec yield has ranged in the higher zone climbing up since early January from the 5.1 levels to crossing the 7% mark on some days in March. • RBI Governor tells markets not to be ‘unduly worried’ even as government borrowings are at their peak. • The 10 year benchmark has now changed to the 6.05% gilt maturing in 2019. • ECB disappointed markets with a 25 basis points cut, less than expected; yet rates are at an historic low at 1.25%. • Bank of England expected to keep rates steady now at 0.5%, the lowest in the Bank’s 315 years history. • World over central banks note that rate cuts are not being passed on by banks, policy effectiveness limited. 89

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Read Safe bonds can bite back Exchange Rates • Exports fell again in February, registering a 21.7% fall in dollar terms and 3% in rupee terms. Imports fell by 23.3% in dollar terms and 4.4% in rupee terms in February over the same month last year. • Both oil and non-oil imports showed negative growth in February, at 47.5% and 10.2% respectively in dollar terms, reflecting the fall in crude prices and the lower volume of demand in the economy • The trade deficit stood at $115.1 billion for the period April-February, as compared to $82.2 billion for the same period in the last year. • ECB/FCCB funds in February amounted to $452 million for 31 firms, in February 2008, 38 firms brought in funds worth $862 million. • The Balance of Payments data released for Q3 showed highest current account deficit since 1990 at $14.6 billion as exports plunged with the global crisis. • Q3 also saw the first capital account deficit since Q1 of 1998-99 with net outflows in portfolio investment, short term trade credit and banking capital. • China made a call for replacing the dollar with SDRs as the international reserve currency. • Dollar has been losing value in the past one week as sentiment turns away from risk aversion and 90

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx emerging markets seem attractive in the near term. • The rupee fell to a low crossing 52 to a dollar in early March, and has since recovered some of its losses, crossing 50 to a dollar level, its highest in more than a month as capital flowed back into the stock market. Read Dethroning the dollar – what if? China and the dollar- having it both ways Heterogeniety in rural markets – Indicus-Mint series Election fever: Indicus works with Google to generate online elections center ET-Indicus election special:Dip in poverty levels boosts UPA chances Spending with a difference Inflation rises to 0.31% Its disinflation, not deflation that we are facing now 91

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Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 9th March 2009 Highlights • The organized sector reels under the slowdown – will get worse this summer. • Slowdown perceptible across economy - auto, cement, telecom bring small joy. • As predicted RBI cuts rates reluctantly in March – this effort will fail as well. • Government bent upon making it worse – resorts to highest ever borrowings. • India rating crashes, set to fall further. • Lower agri output spells bad news for prices ahead. • Hardly any signs of turnaround yet – but hope can sometimes carry the day. India: Kal, aaj aur kal We did say last time that if the RBI cuts rates, it would do so only in March – that’s what happened, and as we expected (as did the RBI) the markets were not impressed. The monetary overtures were overshadowed by the grim news on the fiscal front, as the government put forth demands for the highest borrowings ever of Rs. 3.6 trillion. The flip-flop over the budget was particularly disturbing, as was the three times revision of borrowings over the year – all with not a bit of apology. The problem is that under the 94

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx excuse of ‘exceptional times’, all that talk of moving towards controlled budgeting and market based pricing in fuel has gone up in vapour. Meanwhile, amidst all this turmoil, we don’t have a full time Finance Minister, a clear indication that the economy really isn’t a priority. The quarterly GDP data is showing a sharp falling trend; even though we take this data with a pinch of salt, we would advise everyone to take the falling trend very seriously. International efforts are showing that nothing is working quickly enough, and we also know that no macro-economic models are working. So what should the government do? When no one knows what to do, go back to first principles. The first principles are, spend your money where it has the most impact. But that is not what the government is doing, and is throwing away its money. It is trying to help the organized sector, by giving them all sorts of interest and tax advantages – but these only help those firms that have orders. What about firms whose orders are falling or non- existent? These firms need a lifeline. The lifeline could be on the credit front, where the government can ask FIs to distinguish between company specific and structural/economy-wide shocks and resultant defaults. But there is no such move. As toplines fall, banks reduce credit for working capital – but that is precisely when firms need more leeway. The list is very long. Meanwhile, real estate firms are in deep trouble, and it is surprising that real-estate prices have not fallen more; this only indicates that the banks have restructured the terms of credit. In other words, they have delayed the bad news. The hope must be that, after a quarter or two things will improve; but they are sorely mistaken. This is not a short term slowdown for the real estate sector, and it is not going to see high growth for a long time. The more rapidly we correct the prices, force the companies to reveal the extent of the shock, the better it is for India’s economic stability. 95

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Then there are those who think that the gvernment can spend its way out of this. The reasoning is, that since there is an international recession, prices will remain low, so we can spend as much as we want without fear of inflation. This is a flawed argument, if we spend large amounts, it will increase demand in the country, and to keep prices low, we will need to keep international trade very open – that is, import more. The hit will then be taken on foreign exchange reserves (already down by USD 60 bill), and further impact our ratings if nothing else. The point is, to try and limit one loss, we will need to take a hit somewhere else. The government also needs to ensure that when times do turnaround, India can access international funds – but the large fiscal deficit has powered the downfall of our credit ratings, give it a few months and we will not be in the investment grade anymore. At that time, even if the world will want to invest in India, it will be unable to, as their regulations will prevent them from doing so. Do we have any credible policy measures in place to tackle this upcoming problem, or are we just hoping for the next government to bear the headaches? Going ahead, while this quarter is still set to be a gloomy one, there are some small signs of spring-time joy, (Feb auto sales, price of copper at 3 month high, cement sales up, easing of loan rates from banks etc.) but it is difficult to read too much in these random data elements. Anycase, we do not foresee a smooth path ahead, returning to our recent 9% growth level is a government dream, if we can do 7%, we should be happy. In April, two shows will roll - the IPL and the elections – no prizes for guessing which one will boost sentiments more, which one will boost the economy more. 96

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx P.S. We have started a blog with contributions from Indicus and guest authors too, do join us at www.indicus.net/blog Sumita Kale and Laveesh Bhandari 7th March 2009, Indicus Analytics 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 • GDP Q3 estimates showed slump in growth to 5.3%, slowdown in all sectors, and negative 2.2% growth for agriculture. • Advance estimates of 7.1% growth given by CSO coupled with Q3 estimates released later implies an unlikely 7.5% growth in Q4 – expect downward revision of this year’s growth. • 2nd Advance estimates for 2008-09 put agricultural output down by 1.26%, one of the few crops to show positive growth is rice. • Sugarcane output is down 17% - explaining the rise in sugar prices. • Manufacturing output has been showing a contraction – IIP for December fell by 2%, with downward revisions in November data. • Electricity is a sector that has been under-performing, showing the systemic failure of our infrastructure – February generation was flat over last year at 0.25% growth. 97

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • January infrastructure numbers show growth by 1.4%, compared to last year’s 3.6%. Again, cement and coal are holding up the show. • Cement production grew by 8.5% in January, while despatches rose by 8.3%. February sales as reported in the newspapers are also up and promising. • The ABN-AMRO PMI survey of 500 firms showed that there was another marginal rise in the index for February, over the last month, but still a contraction in the overall index. • While auto sales picked up speed in February, firms are hesitant to call it a reversal in the falling trend. Except for Bajaj Auto, all two-wheelers saw double-digit growth in February, while car sales were high with Maruti and Hyundai leading the pack in growth. • A record number of 15.41 million subscribers were added in the wireless telecom segment in January, as against the 10.7 million added in December and 8.7 million added in January 2008. • Revenue earnings from railway freight grew at 12.85% in the April-January period, Net Tonne Kilometres rose by 5.78%, no significant change over previous year’s 12.34% and 6.74% respectively. Read: Green shoots Recession compounds world food crisis Inflation 98

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Consumer price inflation rose in January marginally with the CPI AL and CPI IW indices registering 11.62% and 10.45% rises respectively. • The WPI continues on its downtrend, provisionally at 3.4% average for February. • The NCDEXAGRI index of spot prices of agricultural commodities, which had plunged from its July highs, has been in a band since October, showing more stability, but all still at a higher level than last May. • Crude oil has moved in the range of 39 to 47$ a barrel in February, leaving behind the low of $33.73 touched in end-December. • Copper shows a similar bottom in the price chart so far, leading some like Mecklai to wonder if the bottom has been reached in manufacturing. Iron ore prices however continue to decline, reflecting diminished demand. • Sugar has been hit by reduced output, prices rising by 15% in 3 months, with demands now for import of refined sugar to bring prices down. Read Food prices to stay volatile over next decade – UN Interest Rates • High borrowing needs of the government and revised fiscal deficit of 6% of GDP for this year, with 5.5% of GDP estimated for 2009-10, has brought pressure on the bond prices, raising yields. • RBI cut rates as expected early in March but need for higher borrowings keeps yields high. • The 10 year gilt 8.24% 2018 Gsec rose to a high of 6.6415% towards the end of the month and then to 6.75% on March 6th, a 3-month high. 99

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • RBI contracted transfer of MSS bonds to the government’s cash account to keep a lid on the rate rise. • In the second week of March, central and state governments are set to raise Rs. 36,000 crores putting more pressure on the markets. • Bank of England crashes rates to a record low of 0.5%, following the Fed, and begins quantitative easing – unprecedented step of printing money. • ECB cuts rates to 1.5%, warning calls of ‘overshooting’ (see reference below). Read ECB’s Bini Smaghi – Central banks should not overshoot with rates Exchange Rates • Exports fell by 15.9% in dollar terms in February, rising by 4.2% in rupee terms, while imports grew by –18.2% in dollar terms and 1.4% in rupee terms. • Trade deficit rose to $444 billion for the period April- January compared to $ 269 billion for the same period last year. • The rupee has taken a hit with funds pulling out of the country, with S&P’s placing India in negative rating category, coming close to 52 to a dollar. • All currencies, including the Swiss franc have been beaten down against the dollar, as long as the dollar demand remains from the global banking system, expect dollar to stay strong. Read 100

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Debate: will the economic crisis weaken the rupee? View of the day – dollar strength will linger The inertia of motion The global crisis debate Lessons from the current crisis The results of living it up Will inflation strike us back in 2009-10? Lip service The Left’s record The sorry state of West Bengal 101

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 103

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. 104

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 105

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 106

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx sector has seen the boost for Honda and Maruti, other auto majors have not been so fortunate. • 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 107

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. 108

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. 109

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • 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. • 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 110

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx 6th January 2009 Indian Economy Next Quarter Data finally shows what we all have known – exports, growth, prices all fall. Downward momentum to continue for this quarter and level out in the next. But a steep crash averted. RBI slashes rates, govt stimulus packages announced. No fiscal space for more cuts, expect more in the budget/vote on account. Recovery now seen only by September 2009. We have started a blog with contributions from Indicus and guest authors too, do join us at www.indicus.net/ blog India : Kal, aaj aur kal Finally 2008 is over. With two stimulus packages behind us, the government firmly stated there was no fiscal space for anything more. This admission is in a way a relief because it shows that there is some recognition of the need for curbs on spending and tax cuts. There was also the stated emphasis on ‘improving the implementation of projects’. But don’t expect much from this, at best we will see another committee or group of ministers. The opportunity lies in tightening implementation, cleaning up rules and procedures, removing contracting hurdles, setting up a real-time monitoring mechanism, and improving cross-ministerial interaction. All of this can be achieved without new bills and policies. But this government preferred to use monetary and fiscal means to circumvent implementation hurdles. The economist politicians perhaps know the pointlessness of using the hammer of fiscal and monetary policy to tighten the microscopic nuts and bolts of implementation. But the poor guys are unable to do more; at some point in the near future the real politicians will have to once again run the economy – only they can manage on-the-ground reforms. Going ahead, the outlook shows that while the broad trend is one of downward momentum, some sectors like infrastructure, agriculture show promise. Though data are not in, agri input suppliers, and rural marketers are reporting a boom in sales – likely due to a good crop combined with higher prices. Infrastructure sector will continue to improve steadily going by the allocations and the announcements. However, there is some time lag and a few months may pass before we can hope to declare an infrastructure sector boom. Again, big business is likely to recover much faster than the small sector, which will need significant recourse to credit to get back into business. Small businesses are reporting a steep fall in their working capital and access to credit, and also a sharp rise in payments due from large companies. This is even more so in the case of services oriented small businesses. Expect extremely poor times ahead for this segment. What is also clear is that by the second half of 2009, there will an overall improvement. Though another crash in the US housing market cannot be completly ruled out, it is unlikely given the large give-aways disguised as stimulus packages in the western countries. For once we join the leftists in saying ‘do not copy the west’. We have all seen the great opportunities that economic freedom, devoid of fund allocation by governments, can create. The markets are now in the self correction mode, and the growth slowdown is a symptom of this. The bubbles in the real estate and high end salaries need to subside if India has to emerge a stronger economy. Indian and international governments have stopped the assets markets from crashing further and saved many large private firms. 112

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx There is no need to save any more. In other words, it is now the right time to get over our collective pessimism (or should we call it the slowdown syndrome?) Check out the latest initiative from Indicus in Hindi: news.raftaar.in Sumita Kale & Laveesh Bhandari, 6th January, 2009, Indicus Analytics. Contact: sumita@indicus.net & laveesh@indicus.net Economic Growth IIP growth plunged in October, a negative growth of 0.4%, manufacturing did badly at –1.1%. Electricity has consistently been under-performing; provisional numbers show 1.34% growth in December over last year. The ABN-AMRO PMI survey of 500 firms showed another contraction in December, the hit coming hardest from new orders from abroad. For the first time since the survey began in 2005, employment also contracted as firms streamlined their workforce. Telecom continued its growth run with 10.18 million subscribers added in November, compared to 8.22 million last November. Railways are showing the effect of the slowdown now; revenue from freight grew at just 2.24% in November, compared to the 10.7% growth last November. On the agricultural front, while most crops showed a positive growth in acreage over last year, rice was down by 12.9%, (as on 19th December), wheat was marginally lower by 0.1%, urad and moong were down by 25.7% and 19.7%. Read: The threat of revisionism Read: Are you ready for 2009? Inflation Consumer prices stayed high, but moderated rise in November CPI AL showed inflation at 11.11%, while CPI IW had 10.45% inflation. Wholesale Price Index for December has seen a further plunge to under 7% levels, as fuel price cuts took place and manufacturing output and raw material prices declined. Spot prices for agricultural commodities on NCDEX have also seen a decline in December. Crude oil moved below $40 a barrel in December, though it has recovered since, due to political tensions in the Middle East. As stated in the previous newsletter, WPI inflation was all set to come in the 5-6% levels, easing concerns for monetary policy. However, going ahead, the volatility of 2008 continues to be worrisome, making even medium term inflation trends difficult to predict, with sufficient certainty. Read: Oil curve steeper than ’99, shows possible gain in ‘09 Interest Rates RBI slashed rates again- repo rate down to 5.5%, reverse repo at 4.0%, CRR at 5%(the last to be effective from January 17th). All banks have now reduced their lending rates, PLRs are down. With the Fed cutting rates to near zero in December, there is lots of debate over whether this is the right strategy for long-term sustainable growth. The 10-year benchmark gilt has had its yield crashing down to 5-6% in December as inflation fell and rate cuts became sharp. While there is still expectation of further rate cuts from the RBI, such measures will now be taken depending on how the situation evolves on industrial growth, credit etc. 113

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Read: Indian bonds have best year since 2001 on inflation, rate cuts Exchange Rates Exports fell in November by 9.9% in dollar terms, imports grew by 6.1%. In rupee terms they grew by 19.4% and 33% respectively. Oil imports were 11.9% higher in November than last year, in dollar terms, while non-oil imports grew by just 3.4%, signalling the low activity in domestic industry. Trade deficit for April-November 2008 stood at $ 84.3 billion, compared to $ 53.2 billion during the same period last year. Balance of payments data for Q2 of 2008-09 showed record current account deficit of $12.5 billion, thanks to high crude prices ranging at that time. On the capital account, net capital flows at $19.9 billion for the period April-September were much lower than the $ 50.9 billion in the same period last year. The rupee has seen significant volatility since October and ranged between a low of 47.08 to a dollar to a high of 50.52 in the month of December. Going ahead, while the long-term view is towards appreciation, a lot depends on the outlook of the economy and the markets in bringing in capital. Volatility is not expected to reduce in the next quarter. 114

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Emerging Economy Indicus Analytics December, 2008 9th December 2008 Indian Economy Next Quarter Government announces measures to support large business. Spoilt brats ask for more. Official data finally shows growth slowdown – expect 5.5-7.5% this year. Inflation collapses with energy and commodity prices, food articles still high. Good rabi crop expected this year - farm and rural incomes to rise. Govt. expenditure to rise substantially; may help growth but raise inflation. India : Kal, aaj aur kal Slowdown continues, but economy appears to be getting out of the depths of pessimism it had gotten into in the last few weeks. Though international conditions remain quite bleak, India has managed to hold its own in the last few weeks, and has not collapsed like many predicted. The worst is of course not over yet, but there our economy has shown a lot of spine. The same cannot be said of much of the organized large business, which wants greater and greater handouts. Let’s put things in perspective here. A number of companies and business groups had over- extended themselves, in the belief that low interest rate – easy access to funds combination would continue for a while. When this did not materialize on account of international forces and RBI action, they got into trouble. Since the economy, to some extent does depend upon the performance of the corporate sector, the government can not be faulted for some of the corrective measures. But the fact remains, recent government actions are meant to support the corporate sector, and the corporate sector wants the people of India to pay much more for its sins. It has been argued that the interest rate regime created by the RBI was too high, and the controls put in place by the Finance ministry were impacting the corporate sector and economy adversely in the era of international recession. These obviously needed to be relaxed. As long as the government sticks to doing that, it is fine. But we need to guard against measures that provide additional support. Net net, it is important to limit real-estate and wage bubbles for sustained and equitable long term growth. There is too much uncertainty this year to give a point estimate for growth, but most people aren’t satisfied with our estimated range of 5.5-7.5%. Actually, it is time that people planned for differing scenarios…things could get worse, they could also get better. The fall in crude was unprecedented and the flip side has been global recession and the accompanying dollar rise. Meanwhile, there are many positives and the overwhelming gloom and doom stories being painted are one sided. Agri is of course the star, with record harvest being now predicted - despite what the government data said a couple of months back. Also with higher minimum support prices, farm incomes will give that much-needed support for aggregate demand. Telecom is still going strong, if a rural push is maintained; this will have valuable spin-offs in raising demand. While luxurious penthouses are thankfully out, the low cost 1 BHK is back in fashion again, as builders are pushed to satisfy the markets with lower margins. Healthcare continues to grow rapidly, Education – among the largest sectors – is changing in structure and scale rapidly, and the electorate is rewarding politicians who serve the masses. 115

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx All in all despite terror, politicians, corporate lobbying, international pressures, India moves along, thank you very much. Sumita Kale & Laveesh Bhandari 9th December 2008 Indicus Analytics Contact : sumita@indicus.net & laveesh@indicus.net Click to leave comment Economic Growth GDP for July-September 2008 at 7.6%, slows down from 7.9% of Q1. Manufacturing shows steepest fall to 5.0% growth from 9.2% last year. The sector that grew the fastest was trade, hotels, restaurants with 10.8% growth, compared to 11.0% last year. The decline in growth of electricity (3.6%) and mining (3.9%) remain as long term causes of concern. IIP for September grew at 4.8%, compared to 6.98% last year. Manufacturing slowdown showed up sharply in the ABN-AMRO PMI survey which revealed a contraction in the index in November. New orders and export indices slumped reflecting the sudden downturn in demand worldwide. Electricity generation slowed to a growth of 2.57% in November, provisional data from CEA showed. Agriculture rabi sowing is well under way and reported acreage sown till 21st November showed significant 14.1% rise in all crops, except a decline in wheat, due to excess soil moisture in UP, Punjab and Bihar. Outlook is good for the season. 10.3 million subscribers added on the telecom network in October alone, showing that this is one sector that has been bucking the trend so far. Railway freight revenue has risen by 16.3% in the period April-October, with the Net Tonne Kilometres going up by 8.26%, compared to 11.05% and 5.34% rise last year respectively. Read: The West in recession Read: The global crisis and India’s growth rate Inflation Consumer prices for October showed continued rising trend with CPI AL at 11.14% and CPI IW at 10.45% inflation. While WPI fell to around 9% in November, primary articles and food articles inflation continued to be high at 11.98% and 10.43% respectively for the week ending November 22nd. PMI survey showed decline in the input and output price indices in November as crude and commodity prices fell globally. Crude oil has fallen below $50 a barrel as global demand has fallen and the dollar strengthened. With fall in crude, the 7% inflation target of RBI seems very feasible, if trend continues, inflation can come down further into the 5-6% range. Expecting a new series of WPI from January that will change all these calculations. Read: The Oil and Gas Industry: Stable or Volatile Interest Rates 116

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Rate cuts by the RBI in have brought the CRR down to 5.5%, repo down to 6.5% and reverse repo cut to 5%. As inflation eases around the world and growth becomes a worry, banks cut rates, raising expectations of more rate cuts in India. The ECB, Bank of England are expected to make the most aggressive rate cuts ever but there is a growing feeling that this is not quite the solution to the problem, even if markets seem to be demanding it. In the US, while the fed rate is down to 1%, there has hardly been any change in mortgage rates for the sector most hit, leaving households bereft of any help. In India, the market now expects more cuts and the RBI is all set to oblige. Read: Monetise public debts and deficits (especially the comments section of this post) Read: A race to the bottom Exchange Rates Exports fell for the first time in October by 12.1% over last year in dollar terms, imports rose by 10.6%. While oil imports were up by 22% in October, non-oil imports rose by just 5.5%. The trade deficit for the period April-October was $72.99 billion, compared to $45.64 billion last year. The rupee has been plummeting since August, and has now crossed the 50 to a dollar mark – an all time low. RBI has intervened to reduce intra-day volatility but the level is beyond all help. The dollar has been growing in strength worldwide, even though the fundamentals of the US economy do not warrant this trend long term. Read: Forex reserves: Sinking feeling 117

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Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Emerging Economy Indicus Analytics November, 2008 4 November 2008 Indian Economy Next Quarter RBI slashes rates before and after the mid-term review, expect little else next few weeks Pessimism continues to rule though Sensex finds some support at 9-10,000 Corporate sector cuts back new investments, hiring and marketing spends Crude collapses but fuel price cut not likely Govt. admits fiscal deficit target will not be met All financial and macro-economic models have become dysfunctional India : Kal, aaj aur kal October, what a dramatic month! Markets crashed worldwide, taking currencies down with them and creating what has been now been called a ‘financial tsunami’. The madness of the media rivalled the madness in the markets as anchors squeezed out stories from the minute by minute ticker. All of this was predicted few months back, and we were among those who did so as far back as November 2007 and repeated our concerns in Feb 2008. Indian policy makers however kept up with their pro- inflationary fiscal policies of increased government expenditure on the one hand and liquidity tightening monetary policies on the other. This is a familiar pattern and occurred in the 1990s as well - profligacy and inflation followed by interest rate tightening and growth slowdown. This time it is of course much worse, with the impact of the financial imbalances in the international economy. This will result in a slowdown in Indian exports, and there will also be a slowdown in Indian investment growth especially in the corporate sector. We do not however expect any recessionary tendencies to affect India. Some sectors will no doubt be affected adversely, and the strong growth momentum will level a bit, India will however sail out of these troubled times relatively smoothly. Among areas of concern, to inflation is now added financial and macro-economic stability. Given the rapidly changing situation, to its credit the government has approached this crisis in a mature manner. Increasing liquidity and reducing interest rates, strengthening of some institutions that appeared to be weak, and allowing markets to stabilize by themselves have significantly and positively impacted the long term confidence in Indian markets. This augurs well for the future. Since inflation drives politics and economic policy in India, we would need to keep a close watch on it for some time ahead. On the one hand commodity prices have fallen dramatically, but so has the rupee, thereby reducing its anti-inflationary impact. Combined with a high budget deficit and potential mismatch in supply and demand of some food products (typically of the non-food grain variety), inflation will fall but not dramatically. Economists in the government would find it hard to convince the administrators and politicians to reduce interest rates further. The PM and others have meanwhile supported ‘pump priming’ the economy through additional infrastructure 120

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx investments by the government. Though infrastructure investments are generally welcomed, this would not be very helpful for the problem at hand. Since the money flows would only commence in a few years, when the worst of the growth slowdown would anyway have been over. Meanwhile large scale government borrowings would only reduce confidence in the intervening period. There is only one way to strengthen confidence in India – good fiscal management, and strong market based institutions. Improved monitoring, quality of regulation, and policy all need to be oriented to these, temporary hiccups notwithstanding. PS: Alan Greenspan admitted that the Fed’s ability to forecast the economy’s trajectory was an inexact science, he said, ‘If we get it right 60% of the time, we are doing exceptionally well.’ True, 60-40 sounds a bit better than 50-50. Sumita Kale & Laveesh Bhandari 4th November 2008, Indicus Analytics Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can be contacted at sumita@indicus.net & laveesh@indicus.net Economic Growth IIP for August crashed at 1.27% growth, a mere 1.15% in Indicus Forecast 2008-09 manufacturing. This is on a double digit base of last August, GDP hence reflective of the slowdown. Electricity generation which grew at a measly 0.77% in August Agriculture over last year, showed slightly better performance in Manufacturing,Mining &Electricity September at 4.38%. Services including Construction ABN-AMRO’s PMI survey showed the lowest index in October. Month of Forecast : September 2008 Biggest fall is in the new orders index, which projects lower output in the future. Auto production grew at 12.7% in the first half of the year, higher than last year’s growth. Sales of passenger vehicles grew by 7.53% while commercial vehicles grew at 3.79%. Auto exports did very well, growing at 27.4% growth in April-September period over last year. Cement production grew by 8.11% in September over last year, while despatches rose by 9.2%, higher than the 4.1% increase seen last September. In aviation, international passenger movement grew in August by 9.3% but domestic passengers declined by 17.1%. International cargo movement grew by 5.8% while domestic cargo by air barely grew at 0.1% in August. Foreign tourist arrivals up by 10.4% in the first half of this year, compared to 14.2% growth last year. Railway freight revenue rose by 18.9% in the period April-September while Net Tonne Kilometres grew by 9.60%. Growth during the same period last year was 9.77% and 4.88% respectively. 10.07 million wireless subscribers were added in September, compared to 7.79 million last September. Broadband subscriber base is now 4.9 million and tele-density in India stands at 30.64% at the end of September. Read: Inflation control chokes growth Inflation 121

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Provisional WPI inflation finally fell below the 11% mark, for the week ending 18th October, sooner than we expected. Final estimates for August inflation continue high revisions coming precariously close to 13%. Inflation measured by the CPI for Agricultural labourers stood at 10.98% in September and 9.77% for CPI IW. Last September these were 7.89% and 6.4% respectively, showing hardening in inflation for the common man. Commodities have crashed worldwide, a good sign for inflation pressures ahead. Crude fell 25% in October, coming down to an average of $73 a barrel. Agri commodities on the NCDEX have shown a decline since the peak in July. However, with the sharp depreciation in the rupee, expect prices to rise in imported commodities like pulses, where stagnation in production has kept imports high. Read: January, inflation data to be released once a month Interest Rates With liquidity concerns hitting India, the RBI slashed the CRR by an unprecedented 150 basis points in the span of a few days. A cut before the policy review was followed by another slashing on a weekend, after the review, keeping the markets on the tenterhooks for decisions. CRR now stands at 6.0% and the repo rate cut to 7.5%, as growth and liquidity take on higher priority than inflation currently. Worldwide rates were cut - a coordinated move by the Fed, ECB, China, UK, Canada, Sweden, Switzerland on October 7th and the Fed cut again on the month end. South Korea slashed by the most ever, its first cut since 2001. The US has gone down from 5.25% to 1% over 13 months, and more is expected. Bank of Japan seems to be headed for a zero interest rate period again. Meanwhile there are others scrambling to rescue their currencies and raising rates: Denmark did so despite being in a recession, Hungary hiked by 300 basis points and South Africa, Romania seem to be likely contenders in the rate hike zone. Yield on the 10 year benchmark gilt dropped with the rate cuts and from the 9.4635 % high in July, is now at 7.5512 at the end of October. Read: Fed makes breathtaking changes, cut rates too Transcript: Duvvuri Subbarao Exchange Rates 122

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Exports in the month of September rose 10.4% in dollar terms and 24.7% in rupee terms while imports grew by 43.3% in dollar terms and 61.9% in rupee terms over last year. Oil imports had risen by 57.1% while non-oil imports grew by 36.2% in dollar terms. Trade deficit therefore was $ 49.14 billion in the period April-August, compared to $34.54 billion last year. Trade deficit in the first half of this year stood at $ 59.77 billion, higher than $39.1 billion last year. The dollar swung upwards in October, as the so –called flight to quality led to a scramble to buy dollars – the biggest monthly gain in 17 years. The pound fetched its lowest against the dollar since 2002, while the euro also took a battering. The rupee fell through 50 to a dollar briefly, a fall of about 7% in one month as money flowed out of the country, following the trend of stock market lows worldwide. The sharp change in the global environment has led to the fall in the rupee, and other currencies. Led by sentiment, rather than any fundamental change in the strength of the economy, estimating a level for the rupee now has more uncertainty. While the RBI is expected to tame volatility, trends can reverse as suddenly as they set in. Read: 38 to the dollar in 5 years Ring a ring o’ roses 123

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Emerging Economy Indicus Analytics October, 2008 6 October 2008 Indian Economy Next Quarter Kharif output lower than last year on all crops, except rice and jute. Support prices hiked for crops – expect impact on prices ahead. Fiscal deficit already more than 85% of budgeted target – set to grow. FDI strong in construction and services sector this year – investment demand high in India. India : Kal, aaj aur kal While the world is fixed on the financial crisis, there has been little attention on the concerns coming through on our agri front. Latest govt. estimates of kharif crop show negative growth over last year - this has important implications for food, inflation and imports positions ahead. Except for rice and jute, all other crops register lower output this year. What is interesting is the play of factors that has resulted in this situation. Though the monsoon has been normal this year, this is a typical statement that shows the fallacy of averages. Kharif is the first crop season of the year, which accounts for little more than half the foodgrain output in the country. (Wheat is a rabi crop, its output features in the winter season.) It didn’t rain when it was sowing time for kharif crops in July in large parts of the country in the south and the west. With most of the crop rain-fed, there was a heavy demand for irrigation though pumps. But on one hand there was a heavy power shortfall and on the other ,with the crude prices going through the roof and govt. fuel policies upsetting the oil marketing companies, diesel shortages prevented farmers from watering their crop at a critical time. Net result: estimates of acreage sown are down for all crops except rice and soyabean. And then it poured in August and September, causing damage in the fields. In our last newsletter we wrote of the impact of the Bihar floods on agri output in India. Now the govt. has estimated 22 lakh hectares affected across India with Orissa, UP, Andhra and Bihar leading in losses, others like Punjab, Haryana, West Bengal, Assam etc, also figure in the list. This has affected rabi crop sowing this month as the soil is waterlogged. What could the govt. have done? These are problems created by long term neglect – dependence on rain, lack of power, bad fuel policies that leave budgets bleeding, inadequate disaster management and weak support policies..the list is long. Meanwhile the govt has hiked minimum support prices for all kharif crops by huge amounts, there has been a 30-40% rise in MSPs. Announced well after the sowing season to influence farmers decisions, this will have its impact on domestic prices. Prices are bound to be hit. Global food markets are significantly influenced by India’s output numbers – possibility of imports by India raises prices abroad. Coupled with a lower rupee and higher imports, the scenario ahead is clear to all. P.S. We now begin our fourth year of this newsletter. It’s our aim to keep looking ahead and point out the emerging problems and strengths in the economy. We would like to thank all our readers for their support and feedback. Sumita Kale & Laveesh Bhandari 6th October 2008, Indicus Analytics Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can 124

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx be contacted at sumita@indicus.net & laveesh@indicus.net Economic Growth Indicus Forecast 2008-09 Agricultural output for the kharif season below last year’s levels on GDP all crops, except marginal growth in rice and jute. Total acreage sown is down by 2.3% due to bad timing of rains, Agriculture though there have been gains in rice and soyabean. Manufacturing,Mining &Electricity The ABN-AMRO Purchasing Managers Index fell in September to Services including Construction the lowest level since July 2007 - output, new orders and export Month of Forecast : September 2008 orders all grew more slowly. Another 9.03 million subscribers added on the telecom network raising tele-density to 29.83% in August. Last year 8.15 million subscribers were added in the same month. Broadband subscribers now stand at 4.73 million. Revenue earnings from freight traffic increased by 19.82% in the April-August period, and freight carried increased by 8.62%. Last year in the same period, the growth was 9.85% and 6.95% respectively. Domestic air passenger traffic and cargo showed negative growth in July, 14.9% and 1.7% respectively, though international passenger and cargo movement did rise by 9.4% and 4.6% respectively, showing a slowdown in domestic air activity with fare changes. Inflation Consumer prices show hardening with CPIAL inflation for August at 10.29%, CPI IW at 9.02% and CPIUNME for July at 7.39%- all higher than their previous months. Wholesale price index continues high revisions of past numbers- inflation crossed 12% in June. Provisional numbers put inflation in a declining trend since its high of 12.63% for 9th August week. Latest provisional data for week to 20th August shows inflation at 11.99%. The PMI survey showed a cool down in output price increases, though firms continued to face higher input prices of fuel and raw material in September. Crude oil swung lower down as demand in the US shrunk and the dollar strengthened. WPI inflation is set to ease to 11% levels by the end of the year, provided crude does not spike again. Read: Inflation: what the heck is it Interest Rates Benchmark 10 year gilt has come off the 9% highs of August as oil prices eased and global crisis have led to hopes of rate cut in India in the October end monetary policy review. While the gloom on growth and financial worries spread, there is a clamour of rate cuts in Europe and in England, which will in all probability be acceded to. In the US, however, debate is still on if further rate cuts will be the right response to the current conditions. Though the inflationary pressures have eased with crude oil crashing below $100 a barrel, inflation data is still above the central bank comfort zones. Money supply growth still at high 21% in India, not conducive to a cut in rates yet. 10 year yields will take cues from the global factors, and will range between 8-9% in the next couple of months. Read: Free Enterprise anyone? Magic ring to save us may be accounting overhaul Exchange Rates 125

Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Exports grew at 26.9% in August in dollar terms and 33.5% in rupee terms while imports rose even more sharply by 51.2% in dollar terms and 59% in rupee terms. Crude oil imports rose by 76.7% in August over last year while non-oil imports rose by 39.6%. Trade deficit therefore was $ 49.14 billion in the period April-August, compared to $34.54 billion last year. Current account deficit on the balance of payments for the first quarter of the year rose to $10.7 billion from $6.3 billion in Q1 07-08. Net invisibles surplus stood at $20. 9 billion compared to $14.4 billion in the first quarter last year. This was due to higher remittances and software growth. $2052.40 million was the net outflow of FII equity in September as the financial crisis in the US pulled money out of all markets. Since January, there has been a net outflow of $ 9120.50 million from the Indian markets. June FDI shows that highest FDI in the first quarter of this year went to construction activities ($ 5.8 billion), followed closely by the services sector. While the dollar has been gaining strength worldwide, the rupee is close to 47 to a dollar, depreciating almost 6% in September. The rupee has depreciated against all other currencies as well as it has taken a hit from the outgoing capital flows and high oil demand. Rupee has been steadily losing value since January this year. With crude still higher than last years levels and domestic demand strong, expect depreciation pressures to continue. Rupee to stay ranged between 46 and 47.5 for the next couple of months. Read: Anchoring Bretton Woods III 126

Emerging Economy - Indicus Analytics - A compilation

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