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The Emerging Economy December 2009

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Highlights …

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

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 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.

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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 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
  • 2. 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
  • 3. 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.
  • 4. 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
  • 5. 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
  • 6. 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.
  • 7. 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
  • 8. 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
  • 9. 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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