Emerging Economy - Indicus Analytics - A compilation

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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

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.

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.

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Emerging Economy - Indicus Analytics - A compilation

  1. 1. 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
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. 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
  34. 34. 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
  35. 35. 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
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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
  40. 40. 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
  41. 41. 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
  42. 42. 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
  43. 43. 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
  44. 44. 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
  45. 45. 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
  46. 46. 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
  47. 47. 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
  48. 48. 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
  49. 49. 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
  50. 50. 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
  51. 51. 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
  52. 52. 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
  53. 53. 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
  54. 54. 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
  55. 55. 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 55
  56. 56. 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
  57. 57. 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
  58. 58. 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
  59. 59. 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
  60. 60. 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
  61. 61. 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
  62. 62. 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
  63. 63. 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
  64. 64. 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
  65. 65. 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 65
  66. 66. 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
  67. 67. 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

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