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

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

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

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

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

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

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

Indicus Analytics, An Economics Research Firm
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View of the day – dollar strength will linger
The inertia of motion
The global crisis debate
Lessons from the current crisis
The results of living it up
Will inflation strike us back in 2009-10?
Lip service
The Left’s record
The sorry state of West Bengal

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