Indicus Analytics, An Economics Research Firm
                               http://indicus.net/Newsletter/Emerging_Econom...
Indicus Analytics, An Economics Research Firm
                              http://indicus.net/Newsletter/Emerging_Economy...
Indicus Analytics, An Economics Research Firm
                          http://indicus.net/Newsletter/Emerging_Economy.asp...
Emerging Economy January 2009 - Indicus Analytics
Emerging Economy January 2009 - Indicus Analytics
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Emerging Economy January 2009 - Indicus Analytics

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Indian Economy Next Quarter
• Data finally shows what we all have known – exports, growth, prices all fall.
• Downward momentum to continue for this quarter and level out in the next.
• But a steep crash averted.
• RBI slashes rates, govt stimulus packages announced.
• No fiscal space for more cuts, expect more in the budget/vote on account.
• Recovery now seen only by September 2009.

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Emerging Economy January 2009 - Indicus Analytics

  1. 1. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx 6th January 2009 Indian Economy Next Quarter Data finally shows what we all have known – exports, growth, prices all fall. Downward momentum to continue for this quarter and level out in the next. But a steep crash averted. RBI slashes rates, govt stimulus packages announced. No fiscal space for more cuts, expect more in the budget/vote on account. Recovery now seen only by September 2009. We have started a blog with contributions from Indicus and guest authors too, do join us at www.indicus.net/ blog India : Kal, aaj aur kal Finally 2008 is over. With two stimulus packages behind us, the government firmly stated there was no fiscal space for anything more. This admission is in a way a relief because it shows that there is some recognition of the need for curbs on spending and tax cuts. There was also the stated emphasis on ‘improving the implementation of projects’. But don’t expect much from this, at best we will see another committee or group of ministers. The opportunity lies in tightening implementation, cleaning up rules and procedures, removing contracting hurdles, setting up a real-time monitoring mechanism, and improving cross-ministerial interaction. All of this can be achieved without new bills and policies. But this government preferred to use monetary and fiscal means to circumvent implementation hurdles. The economist politicians perhaps know the pointlessness of using the hammer of fiscal and monetary policy to tighten the microscopic nuts and bolts of implementation. But the poor guys are unable to do more; at some point in the near future the real politicians will have to once again run the economy – only they can manage on-the-ground reforms. Going ahead, the outlook shows that while the broad trend is one of downward momentum, some sectors like infrastructure, agriculture show promise. Though data are not in, agri input suppliers, and rural marketers are reporting a boom in sales – likely due to a good crop combined with higher prices. Infrastructure sector will continue to improve steadily going by the allocations and the announcements. However, there is some time lag and a few months may pass before we can hope to declare an infrastructure sector boom. Again, big business is likely to recover much faster than the small sector, which will need significant recourse to credit to get back into business. Small businesses are reporting a steep fall in their working capital and access to credit, and also a sharp rise in payments due from large companies. This is even more so in the case of services oriented small businesses. Expect extremely poor times ahead for this segment. What is also clear is that by the second half of 2009, there will an overall improvement. Though another crash in the US housing market cannot be completly ruled out, it is unlikely given the large give-aways disguised as stimulus packages in the western countries. For once we join the leftists in saying ‘do not copy the west’. We have all seen the great opportunities that economic freedom, devoid of fund allocation by governments, can create. The markets are now in the self correction mode, and the growth slowdown is a symptom of this. The bubbles in the real estate and high end salaries need to subside if India has to emerge a stronger economy. Indian and international governments have stopped the assets markets from crashing further and saved many large private firms. There is no need to save any more. In other words, it is now the right time to get over our collective pessimism (or should we call it the slowdown
  2. 2. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx syndrome?) Check out the latest initiative from Indicus in Hindi: news.raftaar.in Sumita Kale & Laveesh Bhandari, 6th January, 2009, Indicus Analytics. Contact: sumita@indicus.net & laveesh@indicus.net Economic Growth IIP growth plunged in October, a negative growth of 0.4%, manufacturing did badly at –1.1%. Electricity has consistently been under-performing; provisional numbers show 1.34% growth in December over last year. The ABN-AMRO PMI survey of 500 firms showed another contraction in December, the hit coming hardest from new orders from abroad. For the first time since the survey began in 2005, employment also contracted as firms streamlined their workforce. Telecom continued its growth run with 10.18 million subscribers added in November, compared to 8.22 million last November. Railways are showing the effect of the slowdown now; revenue from freight grew at just 2.24% in November, compared to the 10.7% growth last November. On the agricultural front, while most crops showed a positive growth in acreage over last year, rice was down by 12.9%, (as on 19th December), wheat was marginally lower by 0.1%, urad and moong were down by 25.7% and 19.7%. Read: The threat of revisionism Read: Are you ready for 2009? Inflation Consumer prices stayed high, but moderated rise in November CPI AL showed inflation at 11.11%, while CPI IW had 10.45% inflation. Wholesale Price Index for December has seen a further plunge to under 7% levels, as fuel price cuts took place and manufacturing output and raw material prices declined. Spot prices for agricultural commodities on NCDEX have also seen a decline in December. Crude oil moved below $40 a barrel in December, though it has recovered since, due to political tensions in the Middle East. As stated in the previous newsletter, WPI inflation was all set to come in the 5-6% levels, easing concerns for monetary policy. However, going ahead, the volatility of 2008 continues to be worrisome, making even medium term inflation trends difficult to predict, with sufficient certainty. Read: Oil curve steeper than ’99, shows possible gain in ‘09 Interest Rates RBI slashed rates again- repo rate down to 5.5%, reverse repo at 4.0%, CRR at 5%(the last to be effective from January 17th). All banks have now reduced their lending rates, PLRs are down. With the Fed cutting rates to near zero in December, there is lots of debate over whether this is the right strategy for long-term sustainable growth. The 10-year benchmark gilt has had its yield crashing down to 5-6% in December as inflation fell and rate cuts became sharp. While there is still expectation of further rate cuts from the RBI, such measures will now be taken depending on how the situation evolves on industrial growth, credit etc. Read: Indian bonds have best year since 2001 on inflation, rate cuts Exchange Rates
  3. 3. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Exports fell in November by 9.9% in dollar terms, imports grew by 6.1%. In rupee terms they grew by 19.4% and 33% respectively. Oil imports were 11.9% higher in November than last year, in dollar terms, while non-oil imports grew by just 3.4%, signalling the low activity in domestic industry. Trade deficit for April-November 2008 stood at $ 84.3 billion, compared to $ 53.2 billion during the same period last year. Balance of payments data for Q2 of 2008-09 showed record current account deficit of $12.5 billion, thanks to high crude prices ranging at that time. On the capital account, net capital flows at $19.9 billion for the period April-September were much lower than the $ 50.9 billion in the same period last year. The rupee has seen significant volatility since October and ranged between a low of 47.08 to a dollar to a high of 50.52 in the month of December. Going ahead, while the long-term view is towards appreciation, a lot depends on the outlook of the economy and the markets in bringing in capital. Volatility is not expected to reduce in the next quarter.

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