Emerging Economy January 2010 Indicus
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Emerging Economy January 2010 Indicus

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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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  • 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 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