Emerging Economy April 2009 Indicus Analytics

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Highlights
• The economy has bottomed in India and internationally
• Expect a very slow turnaround from now but numbers look bad till Q3 ‘09
• Manufacturing recovery in India commences
• Stock markets rally as if worst is over – but too bullish for our liking
• G20 meet says the right things, adds value to the IMF
• Inflation under wholesale prices falls dramatically; consumer price inflation to follow in coming months
• Rural markets holding up so far in India, need support from weather going forward.

India: Kal, aaj aur kal

India was taken back by shock last September, as it was hit by the global crisis and events proved the decoupling hypothesis wrong. While the pendulum swung immediately in the other direction and capital pulled out, exports shrunk, the capital account went into a deficit for the first time since 1998-99, just about as suddenly, the situation appears to be changing. Words like ‘green shoots’, ‘end of fear’, etc. have begun to come back on the scene even as manufacturers begin to look less shell-shocked as before, the stock market rallies and the rupee gains strength. Some hard numbers to support this reversal in sentiment - the JP Morgan Global PMI indices(reference given below), show that Indian manufacturing has contracted the least and has swung back the fastest to touch a 49.5 index in March. Of course, it will take another few months to show a clear trend but the bottoming off seems to have happened. This only supports our assertion that low or falling prices after a bubble are a signal of rationally functioning markets and therefore good for the economy.

This of course does not in any way mean that all production numbers will just as suddenly turn positive or double digit – they will still look bleak for another quarter or so. What has happened is that just as a while back, things were looking worse than expected, now they are looking better than the worst. It is all relative of course, but the fear pychosis seems to have gone.

There are still so many problems to overcome – the fiscal deficit is just one of them. Borrowings are slated to go up even further, and though the RBI Governor has asked markets not to be ‘unduly worried’, it is difficult to see how markets can take this in their stride serenely. While some banks have reduced their rates and it looks now like an all out public vs private sector bank fight on this one, the RBI rate cuts are not being passed on sufficiently. This, by the way, is not a problem unique to India and its banking system - Australia, Indonesia, Israel all report reluctance from the banking system to pass on the cuts.

Credit growth has also significantly reduced as the economy slumped, and this has hit firms very hard. Risk aversion is of higher priority in bank portfolios now, the days of easy credit are over, companies need to realign their plans in these new conditions – the period of ‘painful adjustment’ is on. And for some, specially the small and medium sector, and more so those that were expanding aggressively, there will be very painful times ahead.

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Emerging Economy April 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 April 2009 Highlights • The economy has bottomed in India and internationally • Expect a very slow turnaround from now but numbers look bad till Q3 ‘09 • Manufacturing recovery in India commences • Stock markets rally as if worst is over – but too bullish for our liking • G20 meet says the right things, adds value to the IMF • Inflation under wholesale prices falls dramatically; consumer price inflation to follow in coming months • Rural markets holding up so far in India, need support from weather going forward. India: Kal, aaj aur kal India was taken back by shock last September, as it was hit by the global crisis and events proved the decoupling hypothesis wrong. While the pendulum swung immediately in the other direction and capital pulled out, exports shrunk, the capital account went into a deficit for the first time since 1998-99, just about as suddenly, the situation appears to be changing. Words like ‘green shoots’, ‘end of fear’, etc. have begun to come back on
  2. 2. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx the scene even as manufacturers begin to look less shell- shocked as before, the stock market rallies and the rupee gains strength. Some hard numbers to support this reversal in sentiment - the JP Morgan Global PMI indices(reference given below), show that Indian manufacturing has contracted the least and has swung back the fastest to touch a 49.5 index in March. Of course, it will take another few months to show a clear trend but the bottoming off seems to have happened. This only supports our assertion that low or falling prices after a bubble are a signal of rationally functioning markets and therefore good for the economy. This of course does not in any way mean that all production numbers will just as suddenly turn positive or double digit – they will still look bleak for another quarter or so. What has happened is that just as a while back, things were looking worse than expected, now they are looking better than the worst. It is all relative of course, but the fear pychosis seems to have gone. There are still so many problems to overcome – the fiscal deficit is just one of them. Borrowings are slated to go up even further, and though the RBI Governor has asked markets not to be ‘unduly worried’, it is difficult to see how markets can take this in their stride serenely. While some banks have reduced their rates and it looks now like an all out public vs private sector bank fight on this one, the RBI rate cuts are not being passed on sufficiently. This, by the way, is not a problem unique to India and its banking system - Australia, Indonesia, Israel all report reluctance from the banking system to pass on the cuts. Credit growth has also significantly reduced as the economy slumped, and this has hit firms very hard. Risk aversion is of higher priority in bank portfolios now, the days of easy credit are over, companies need to realign
  3. 3. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx their plans in these new conditions – the period of ‘painful adjustment’ is on. And for some, specially the small and medium sector, and more so those that were expanding aggressively, there will be very painful times ahead. The launch of the world’s cheapest car brought the Tatas and India back into the spotlight worldwide but also triggered off sharp debates: prospective traffic congestion alarms some while others are thrilled and wonder why cars should be just the privilege of the rich. The larger point actually is better mass public transport and urban planning. Here actually the government scheme to buy buses under the JNNURM must be lauded, we wish there were more such initiatives under the fiscal stimulus packages. Other main issues that never seem to get resolved are infrastructure, education and healthcare..all sectors that constrain growth in our country. Remains to be seen whether the next government can move things along a fast track. 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 8th April 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.
  4. 4. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Economic Growth • IIP shows negative growth for second month in succession, -0.5% in January 09, with manufacturing showing growth at a negative 0.8%. • More interestingly, the IIP for December showed an upward revision of almost 2 percentage points with growth moving from the provisional –2.0% to –0.6%. The final figure will be released after another month, though. • Electricity generation shows a big boost in March, growing provisionaly at 5.87%, compared to the 3.64% last March, though this is still about 7% less than the targeted generation. • Cement production grew by 8.6% while sales grew by 8.7% in February. • Auto sales did well again in March, M&M reported 11.3% growth in domestic sales though exports slumped, Maruti’s Alto did its highest ever sales, crossing the 20,000 mark for the 11th time, a record for any car in India. • Telecom continued its high performance, adding 13.42 million wireless subscribers in February, taking tele-density to 35.65% in India. • Air passenger traffic fell by 11% while freight fell by 8.2% in January 2009. • Ports handled 2.13% more container cargo in 2008-9, the busiest port JNPT had volume falling by 11% in the same year. • Rail freight earnings rise 12.02% in April- February period, continues decline in February. • Water in 81 major reservoirs have dipped to less than last 10 years average levels, with scanty or deficient rainfall till mid- March and higher than temperatures, the water situation
  5. 5. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx needs to be monitored carefully. As yet, no alarm to be sounded on the agri front. • FAO indicates global cereal production will not match last years record. Prolonged dry weather impacting crops in Asia and South America. Read JP Morgan March Global PMI Report shows slightly slowing contraction Turning around cautiously Wall street trades Zegna for denim, tool belts Inflation • Wholesale Price Index inflation crashes to less than 1% in March provisionally, even though there is the index has risen in the last two reported weeks for March. • Revisions to January data continue to be downward: last March revisions were to the order of almost 2 percentage points in inflation.Upward revisions confirm inflationary pressures in the economy. • Consumer Price Indices have high inflation numbers, CPI IW at 9. 63% and CPI AL at 10.79% for February. • Crude oil prices have been on an uptrend since December lows of less than $35 a barrel. The steep crash since July has been stopped, it appears that this is the bottoming out of the crude
  6. 6. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx market – March levels ranged between 42 and 51 dollars a barrel. • Sugar prices have remained high in India, up 30% since October 08, even as government allows sugar mills to import raw sugar at zero duty till September, but had not allowed imports of refined sugar at zero duty yet. Read Asymmetry in commodity prices Interest Rates • With the highest even government borrowing up ahead, 10 year benchmark Gsec yield has ranged in the higher zone climbing up since early January from the 5.1 levels to crossing the 7% mark on some days in March. • RBI Governor tells markets not to be ‘unduly worried’ even as government borrowings are at their peak. • The 10 year benchmark has now changed to the 6.05% gilt maturing in 2019. • ECB disappointed markets with a 25 basis points cut, less than expected; yet rates are at an historic low at 1.25%. • Bank of England expected to keep rates steady now at 0.5%, the lowest in the Bank’s 315 years history. • World over central banks note that rate cuts are not being passed on by banks, policy effectiveness limited.
  7. 7. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Read Safe bonds can bite back Exchange Rates • Exports fell again in February, registering a 21.7% fall in dollar terms and 3% in rupee terms. Imports fell by 23.3% in dollar terms and 4.4% in rupee terms in February over the same month last year. • Both oil and non-oil imports showed negative growth in February, at 47.5% and 10.2% respectively in dollar terms, reflecting the fall in crude prices and the lower volume of demand in the economy • The trade deficit stood at $115.1 billion for the period April-February, as compared to $82.2 billion for the same period in the last year. • ECB/FCCB funds in February amounted to $452 million for 31 firms, in February 2008, 38 firms brought in funds worth $862 million. • The Balance of Payments data released for Q3 showed highest current account deficit since 1990 at $14.6 billion as exports plunged with the global crisis. • Q3 also saw the first capital account deficit since Q1 of 1998-99 with net outflows in portfolio investment, short term trade credit and banking capital. • China made a call for replacing the dollar with SDRs as the international reserve currency. • Dollar has been losing value in the past one week as sentiment turns away from risk aversion and
  8. 8. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx emerging markets seem attractive in the near term. • The rupee fell to a low crossing 52 to a dollar in early March, and has since recovered some of its losses, crossing 50 to a dollar level, its highest in more than a month as capital flowed back into the stock market. Read Dethroning the dollar – what if? China and the dollar- having it both ways Heterogeniety in rural markets – Indicus-Mint series Election fever: Indicus works with Google to generate online elections center ET-Indicus election special:Dip in poverty levels boosts UPA chances Spending with a difference Inflation rises to 0.31% Its disinflation, not deflation that we are facing now
  9. 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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