Emerging Economy February 2010 Indicus Analytics

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Highlights

o Growth surging ahead, now estimated at about 7.2 percent for 2009-10
o Upward growth momentum to continue into this quarter and beyond
o All real investment indicators continue their rise – high government expenditures crowding out investment only marginally
o Inflation soaring in CPI, set to abate with rabi crop arrivals in another month
o Government friendly RBI not keen to up the interest rates – but keeping close watch
o Employment expectations moderate, slight turnaround in organized sector
o Fiscal deficit crucial indicator for inflation and growth ahead

The announcement of growth figures for 2009-10 at 7.2 percent where all sectors are expected to be growing at above 8 percent (barring agriculture at -0.2 percent and construction at 6.5 percent), reveal that the Indian economy has held up remarkably well in face of a severe deficiency of rainfall and the international economic and financial meltdown. These figures augur very well for future growth which, as we have maintained elsewhere will enter the 9-10 percent long term trend in the next decade.

Already macro figures indicate that investment levels have not been affected too much over the last two years, and we believe will continue to be healthy in coming quarters and years. Moreover, after a long gap investment in agriculture related infrastructure will start to show an increase – though a large part of it will be coming from private entities and may not show up in the budget figures.

Currently all eyes however are on the budget for 2010-11 - to be unveiled this month as the government will put forth its plan to wean the economy off the stimulus granted during the global crisis. We expect the government to increase the excise levels somewhat but not totally to the pre-stimulus-package levels, minor increases in social sector expenditure spending, and a minor movement in arresting the petro price related deficit. Beyond this, there is little the FM will do.

This stimulus has come at a large cost, as we had been warning in our newsletters earlier. In our May 2009 newsletter we had written about the upcoming dangers, that are clear to all now: ‘ The main problem however will come up later this year, or may even surface next year when the high fiscal deficit 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. …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.’ Over and above this, the news from Europe is not good and will impact international financial markets adversely – this will occur over the next few weeks if not months and India needs to be prepared for it.

Meanwhile, the RBI has also effectively announced that it will not take a hawkish stance on interest rates or liquidity and expects the government to announce some withdrawal of the stimulus package and reduce deficit levels. We expect that that would be in the 5 to 5.5 percent range for 2010-11 budget. But we continue to maintain, this will not be good enough, and the FM should try harder at curtailing the deficit.

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Emerging Economy February 2010 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 10th February 2010 Highlights o Growth surging ahead, now estimated at about 7.2 percent for 2009-10 o Upward growth momentum to continue into this quarter and beyond o All real investment indicators continue their rise – high government expenditures crowding out investment only marginally o Inflation soaring in CPI, set to abate with rabi crop arrivals in another month o Government friendly RBI not keen to up the interest rates – but keeping close watch
  2. 2. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx o Employment expectations moderate, slight turnaround in organized sector o Fiscal deficit crucial indicator for inflation and growth ahead The announcement of growth figures for 2009-10 at 7.2 percent where all sectors are expected to be growing at above 8 percent (barring agriculture at -0.2 percent and construction at 6.5 percent), reveal that the Indian economy has held up remarkably well in face of a severe deficiency of rainfall and the international economic and financial meltdown. These figures augur very well for future growth which, as we have maintained elsewhere will enter the 9-10 percent long term trend in the next decade. Already macro figures indicate that investment levels have not been affected too much over the last two years, and we believe will continue to be healthy in coming quarters and years. Moreover, after a long gap investment in agriculture related infrastructure will start to show an increase – though a large part of it will be coming from private entities and may not show up in the budget figures. Currently all eyes however are on the budget for 2010-11 - to be unveiled this month as the government will put forth its plan to wean the economy off the stimulus granted during the global crisis. We expect the government to increase the excise levels somewhat but not totally to the pre-stimulus-package levels, minor increases in social sector expenditure spending, and a minor movement in arresting the petro price related deficit. Beyond this, there is little the FM will do. This stimulus has come at a large cost, as we had been warning in our newsletters earlier. In our May 2009
  3. 3. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx newsletter we had written about the upcoming dangers, that are clear to all now: ‘ The main problem however will come up later this year, or may even surface next year when the high fiscal deficit 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. …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.’ Over and above this, the news from Europe is not good and will impact international financial markets adversely – this will occur over the next few weeks if not months and India needs to be prepared for it. Meanwhile, the RBI has also effectively announced that it will not take a hawkish stance on interest rates or liquidity and expects the government to announce some withdrawal of the stimulus package and reduce deficit levels. We expect that that would be in the 5 to 5.5 percent range for 2010-11 budget. But we continue to maintain, this will not be good enough, and the FM should try harder at curtailing the deficit. Inflation levels for March end have been estimated by the RBI at 8.5% against the 6% earlier, even as the CPI inflation has been afire the last few months. While part of this is due to the rise in food prices, prices of crucial inputs like steel have been on the rise the last three months as well. As crude has moved in the range we had forecast, there is talk again of the need to free petrol and
  4. 4. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx LPG prices, talk of under-recoveries in OMCs to the tune of Rs. 43,000 crores this year. How long will the govt. continue to push real issues under the carpet? It’s all very well to laud ourselves on an economy that has ‘recovered’ but growth that is fuelled by fiscal profligacy is hardly an achievement. So this year, surprise us, Mr. Finance Minister. Get a move on the real reforms, shake the economy up and let’s see the forces that will let loose real, inclusive, sustainable growth. Sumita Kale and Laveesh Bhandari 8th February 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. Economic Growth • Advance estimates from CSO peg GDP growth at 7.2% in 2009-10, agriculture down by 0.2%, manufacturing up by 8.9% and construction by 6.5%. • Amongst services, trade, transport and communication is expected to grow by 8.3%, finance, insurance and real estate by 9.9% and community services by 8.2%. • IIP growth in November rose to 11.7% over the past year, the highest rate in 2 years. Manufacturing showed growth of 12.7%, mining grew at 10% while electricity generation was a low 3.3% • Electricity generation in December grew by 6.72% over the previous year. In January, provisional estimates put growth at 4.3%.
  5. 5. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • HSBC Markit PMI survey showed a surge in manufacturing activity in January, with the index rising to 57.7, the highest since August 2008. The new orders index rose to a 2 year high. At 62.9, it indicates a strong revival in activity. • Infrastructure sectors grew at 6% in December, compared to 5.3% the previous month. Finished steel output rose by 9.6%. while cement was the leading sector with growth at 11%. • Revenue earning freight traffic carried by the Indian Railways rose by 8.09% in December, earnings have increased by 10.11% during the period April-December. • Naukri Jobspeak index of hiring shows a decline by 6% in December over the previous month, attributed to the holiday season at the end of the year. Hiring activity highest in pharma and health care. • Automakers see path of recovery established now: in January, Maruti sales were up 33%, Hyundai up 42%, Mahindra and Mahindra up 71%, TVS Motors saw brisk sales in both scooters and motorcycle segments, while even General Motors reported its best ever single month sales this January. Ashok Leyland sales grew by 81% in the quarter Oct-Dec reflecting positive trend in commercial vehicles also. • HSBC Markit Business Activity Index that tracks the services sector reported highest level in January since September 2008, but optimism amongst respondents was weak for the future. • After the dip in 2008, domestic aviation traffic grew by 7.8% in 2009. • Foreign tourist arrivals rose in December by 21% over the last year, at 6.4 lakh, with earnings up by 44%.
  6. 6. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Read Budgeting for India’s deficits http://in.reuters.com/article/economicNews/idINIndia-458 15620100201?sp=true Inflation • WPI provisional inflation estimate surged in December to 7.3%, compared to the 4.8% the previous month. Manufactured products group saw a rise of 5.17%, while primary articles prices grew by 14.88% • Consumer price indices rose in December, inflation in CPI IW stood at 14.97% while that for CPI AL stood at 17.21% • Arrival of rabi crop in the markets will stem the rise of food prices. • Global sugar prices rose to a 29 year high on January 21st, and are estimated to drop over the year as Brazil releases more sugar into the market. However, so far supply has been much tighter than expected. • Steel price was again hiked by SAIL in February, in line with the international trends and cost-push. • Crude oil prices, which crossed $80 per barrel in the first week of January, has since stabilised in high seventies. Oil marketing companies are set to run up under-recoveries of Rs. 43,000 crore this year. Read No case for petrol subsidy in India http://www.moneycontrol.com/news/economy/no- case-for-petrol-subsidy-indiams- ramachandran_435551.html Prices and Mr. Pawar
  7. 7. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx http://www.thehindubusinessline.com/2010/01/27/stori es/2010012750240700.htm Interest Rates • The RBI raised the CRR by 75 basis points in its January end review, and left other rates unchanged. • The 10 year gilt benchmark has been on an uptrend since January 2009 – 6.2044 then, the yield stood at 7.5678 at the end of last month. • The Reserve Bank of Australia that had put in three consecutive months of rate hikes, kept the rates unchanged this month as it waits to see the impact of previous measures. • The RBI move followed the hike in reserve requirements in China in mid-January, and the RBI does not anticipate an early rate hike before April, is inflation stays within its estimate of 8.5% by the end of March. Read Transcript of Governor’s interaction with researchers and analysts http://www.rbi.org.in/Scripts/bs_viewcontent.aspx? Id=2111 A more transparent RBI http://www.livemint.com/column/2010/02/02215906/A- more-transparent-RBI.html Exchange Rates • Exports during December 2009 were valued at US $14.606 billion, 9.3 % higher in dollar terms (4.8 % in Rupee terms) than the previous year. Imports were valued at US $ 24.753 billion, a growth of 27 % in dollar terms (22 % in Rupee terms) over the previous year. • Oil imports during December 2009 were valued at US $ 6.536 billion, 42.8 % higher than the previous
  8. 8. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx year, while non-oil imports were estimated at US $ 18.217 billion which was 22.4 % higher than last year. • The trade deficit for April- December 2009 was estimated at US $ 76.242 billion, lower than the deficit of US $ 106.240 billion during the corresponding period the previous year. • The rupee has been gaining strength since last March and rose from its low of 52.06 to a dollar then to a high of Rs. 45.35 early in January. It has been in the range of 45-47 in the last two months, tracking the dollar’s fortunes and capital flow movements. Read Is the sky falling? http://www.emecklai.com/Market_Resources.aspx? name=market_information/dr_risk_prescription Recommendations Socially conscious professional http://www.indicus.net/media/index.php/newspaper/1522 -socially-conscious-professional Dialling financial inclusion http://www.indicus.net/media/index.php/newspaper/1521 -dialling-financial-inclusion Change of state – Bihar gains, Bengal wanes http://www.indicus.net/media/index.php/blogspace/1520- change-of-state-bihar-gains-bengal-wanes In need of service and food http://www.indicus.net/media/index.php/newspaper/1519 -in-need-of-service-and-food
  9. 9. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The best companies to work for http://www.indicus.net/media/index.php/magazine/1518- the-best-companies-to-work-for Moving to segmented http://www.indicus.net/media/index.php/newspaper/1516 -moving-to-segmented Grading regulators http://www.indicus.net/media/index.php/payal- malik/1514-grading-regulators Heart of the middle class http://www.indicus.net/media/index.php/newspaper/1517 -heart-of-the-middle-class Young, single and willing to spend http://www.indicus.net/media/index.php/newspaper/1515 -young-single-and-willing-to-spend Why the elderly should matter to marketers http://www.indicus.net/media/index.php/newspaper/1512 -why-elderly-should-matter-to-marketers How real is Bihar’s stunning growth? http://www.indicus.net/media/index.php/articlesandviews /1511-how-real-is-bihars-stunning-growth?_Views= Indian consumers http://www.indicus.net/media/index.php/happenings-at- indicus/1507-indian-consumers The middle class grows http://www.indicus.net/media/index.php/newspaper/1505 -the-middle-class-grows
  10. 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

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