Emerging Economy May 2009 Indicus Analytics

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Highlights
• As last newsletter predicted, manufacturing recovery has begun.
• Yet, exports will continue to stay depressed, SMEs will take a while to feel the positive swing.
• Prospects for emerging economies brighten, capital flows in.
• Inflows are notoriously fickle, so watch out for any turnaround if political factors disappoint.

India: Kal, aaj aur kal

The numbers are coming in clearer every month as Indian manufacturing recovers, thanks to strong domestic demand, due in large part to money from the pay commission, NREGS, high support prices for agri products last year etc. The fiscal stimulus began much before the global crisis hit India. We are not in anyway close to double digit growth, but the slump does seem to be over. Meanwhile, the stock market believes that all is well with the world, which isn’t true, of course, and if the election outcome disappoints in a fractured mandate, expect a rude shock once again.

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Emerging Economy May 2009 Indicus Analytics

  1. 1. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 8th May 2009 Highlights • As last newsletter predicted, manufacturing recovery has begun. • Yet, exports will continue to stay depressed, SMEs will take a while to feel the positive swing. • Prospects for emerging economies brighten, capital flows in. • Inflows are notoriously fickle, so watch out for any turnaround if political factors disappoint. India: Kal, aaj aur kal The numbers are coming in clearer every month as Indian manufacturing recovers, thanks to strong domestic demand, due in large part to money from the pay commission, NREGS, high support prices for agri products last year etc. The fiscal stimulus began much before the global crisis hit India. We are not in anyway close to double digit growth, but the slump does seem to be over. Meanwhile, the stock market believes that all is well with the world, which isn’t true, of course, and if the election outcome disappoints in a fractured mandate, expect a rude shock once again. The main problem however will come up later this year, or may even surface next year when the high fiscal deficit
  2. 2. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx will combine with rising demand to raise inflation levels substantially. Even now, the WPI which had been forecast by many to hit negative numbers, is still reluctant to oblige; even with the high base effect, large positive week on week rises have kept the WPI inflation in the positive zone. The new CPI indices are due to come into force from next year, while the current data for March has not been released yet, which is another issue altogether. Worldwide, as prices reflect the expectations of demand, we can expect higher levels in basic commodities like crude, copper, steel etc. as news of recovery in emerging economies impacts these markets. Again, we caution that this does not mean a hike into levels above $100 a barrel for crude, for instance, but the range of $40-50 of the past 3 months will move to higher levels of $60-70, consumers, the government and the firms must be prepared for this. The Election Commission has had its hands full this past month and we will be extremely grateful when the code of conduct is lifted and life can go back to normal. EC permission is needed for a range of items: bus fare cuts in Tamil Nadu, relaxation in import duty on sugar..and now the release of consumer price index numbers. In the case of the CPI, the electorate already has a better idea about the inflation affecting their consumption baskets, regardless of what the government data may be saying. It is only analysts who are interested in the numbers and even they look at these numbers with scepticism. Yet, the EC’s code of conduct actually goes to indicate how much of government influence continues in our lives and how much more liberalisation is needed. We have always been of the opinion that cash vouchers are a much better, equitable method of reducing the burden on the poor, rather than price determination by the government.
  3. 3. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The EC should actually also rename all government programmes, airports, ports etc, that are associated with political parties, that would be a service to the electorate! Sumita Kale and Laveesh Bhandari 6th May 2009, Indicus Analytics Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can be contacted at sumita@indicus.net and laveesh@indicus.net. Economic Growth • IIP contracted again in February with a negative 1.2% growth, though January numbers are now revised from negative to positive territory with growth of 0.4%, numbers still to undergo final revision. • Manufacturing fell by 1.4% in February, over last year’s growth of 9.6%. • Cement production grew by 10.43% in March while sales grew by 10.35%. • The six core sectors grew at 2.9% in March, the same rate as March 2008, with cement, electricity and petroleum refineries doing better than before. • ABN AMRO’s PMI survey shows expansion in industrial activity in April, at 53.3 it stands much above the trough of 44.2 in December. Bulk of the boost came from domestic demand. • Electricity generation in April showed good growth of 6.01% over last year, producing 2.67% more than the planned generation for the month.
  4. 4. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • However, ABN AMRO survey showed that power cuts had held up production schedules in many cases in the same month. • Maruti, Hyundai etc. show positive growth in sales in April over last year, though far from double digit numbers. • Hero Honda continues to defy trend with 29.5% growth in April. • 15.64 million subscribers added on in March as part of the telecom growth story, teledensity reaches 36.98%, while broadband subscribers cross 6 million. • Air passenger traffic fell 3.1% for international traffic and 8.9% for domestic traffic, while total cargo declined by 11.3% in February 2009 over the past year. • Uneven weather is expected to hit wheat output in states like Punjab, bringing down the production estimates by 10-20%. • Hiring according to the Naukri JobSpeak fell in March, compared to the February index, a sign that companies were still in the process of consolidation. Read Emerging giants offer hope economy turning http://www.guardian.co.uk/business/feedarticle/8488079 Land grab, the race for the world’s farmland http://www.independent.co.uk/news/business/analysis- and-features/land-grab-the-race-for-the-worlds-farmland- 1677852.html Inflation
  5. 5. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Inflation measured by the Wholesale Price Index which, some were expecting to go into negative zone by March, has actually been on the uptrend, with large positive seen week on week changes in April. • Provisional WPI inflation rose to 0.57% for the week ending April 18th , while final numbers for February continued their downward revision. • Consumer price indices for March are not available as the Election Commission has reportedly prevented the release. • Crude oil has moved up significantly from the lows in December and hovers around $50 a barrel now. • Spike in crude oil, copper etc, cannot be ruled out going ahead as signs of recovery in China, India and Russia raise expectations of demand once again. Read Election code prevents release of CPI numbers http://news.in.msn.com/business/article.aspx?cp- documentid=3005655 New Consumer Price Index likely by August 2010 http://economictimes.indiatimes.com/News/Eco nomy/New-consumer-price-index-likely-by- August-2010/articleshow/4478706.cms Interest Rates • Yield on the 10 year benchmark gilt settled lower to average 6.46% in April, compared to the average of 6.63% the previous month.
  6. 6. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Banks reduced their PLRs and loan rates, in accordance with the lower rate regime signalled by the RBI. • Government borrowings are expected to be even higher than budgeted once the new government sets the agenda for the year ahead. • Ways and Means Advances to the government from the RBI have exceeded Rs. 40,000 crore, double the limit of Rs. 20,000 crores as election expenses and earlier sops are financed. • After the spate of rate cuts around the globe, now countries are going at different speeds depending on domestic factors – Australia has kept rates on hold, South Africa may have hit its floor as well, Brazil expects to slow down pace of cuts, ECB is expected to give its last rate cut in May. Read Are gilt funds losing their shine? http://www.livemint.com/2009/04/26230413/Are-gilt- funds-losing-their-sh.html?h=B Reserve Bank Australia keeps rates on hold http://www.news.com.au/business/money/story/0,28323, 25432700-5016110,00.html Exchange Rates • Exports dropped the highest ever by 33.3% in March over the previous year in dollar terms, and 15.3% in rupee terms. Imports fell by 34.0% in dollar terms and 16.2% in rupee terms. • Trade deficit for 2008-09 has provisionally been set at $119 billion, compared to $88.4 billion in 2007-08.
  7. 7. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Capital inflows resume - $1.3 billion in equity in April, making the rupee rise. • Forex reserves that had fallen steadily from its peak of $ 316 billion in May have stabilised since November, and on 24th April stood at $ 253 billion. • External Commercial Borrowings dropped by 42% in 2008-09 as the global financial sector reeled. About 500 companies raised $18.38 billion compared to 625 firms the previous year sourcing $30.94 billion. • The rupee which had dropped significantly to the low of Rs. 52.06 to a dollar in early March has now rebounded to around 50 levels again as capital inflows boosted the value. Read Asian currencies climb as funds return http://www.bloomberg.com/apps/news? pid=20601087&sid=aD_8M2vH0GDI&refer=home
  8. 8. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx For query or placing orders on Indicus Products please contact Indicus Analytics Pvt. Ltd. 2nd Floor, Nehru House, 4 Bahadur Shah Zafar Marg New Delhi- 110002. Phone: 91-11-42512400/01 E-mail: products@indicus.net www.indicus.net

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