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Figuring it out


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Figuring it out

  1. 1. N D I CU Swww. in d i c u s . n et Figuring it out Lower Forecasts Fail to Beat Hope Earlier target of 9% growth is now out of reach Indicus Analytics Published: Economic TimesAll across the board, growth forecasts for this year are being revised downwards.What has changed in the last few months? Higher than expected inflation in theeconomy and the underlying pressures coming in from commodity and crude oilprices. The RBI has now given a dark forecast for 2011-12 — with growth at 8% — awhole percentage point lower than the government budget estimate and inflation atelevated 9% levels in the first half of the year. There is a clear flip in the stance of theRBI, emphasising the need to accept lower growth in the short term in an effort totame stubborn inflation; and the finance minister seems to be going along with thisnew framework accepting this as bitter medicine.The question now is will the upper end of the range 7.4-8.5% play out or will theeconomy slide down to the lower end? We have always been amongst the mostoptimistic when it comes to growth in India, but given that policy makers are in syncnow with the need to lower growth, our earlier 9% estimate is clearly out of reach.Yet we believe that the below 8% scenario is still less probable than an above 8%growth. It is true that much will depend on how the risks materialise and how steepthe rates will rise over the year. Yet keep in mind that global factors are playing animportant role in the current inflation — commodity prices and most importantly,crude oil being the key, these can be quite volatile.
  2. 2. N D I CU Swww. in d i c u s . n etThe short term energy outlook issued last month by the US Energy InformationAdministration admits that energy price forecasts are highly uncertain, yet places ahigher probability on prices reducing below $100 by December than rising over $120.On an average though, 2011-12 will see prices higher than the previous years, thequestion is by how much and whether this rise will be allowed to pass through or willthe fiscal absorb it? The former would be the most rational solution; it is for thegovernment to ensure that the fiscal rollback is maintained.The uncertainty is not restricted to just crude. Take food prices -- the FAO WorldFood Price Index fell for the first time in nine months in March, with the prices of oilsand sugar contributing the most to the fall in the overall index. There will be greatervolatility this year given the low global inventories, and the picture will be clear inanother few months, with the main stress points in oils. In India rabi crop sowing hasbeen higher than the previous year by 10% and with a good monsoon, pressure onprices can lighten significantly. Since two good years of rains have a significantimpact on consumer sales, given a good monsoon this year, not only will this have apositive impact on food prices, it will also give a boost to consumption in rural andsmall town India.In painting a dire picture ahead, thereby accepting lower growth as a trade-off in thefight against inflation, the government is still shying from addressing the key issues.Reduce growth and inflation comes down, true but what kind of signal is this givingto producers and consumers? More importantly, is there an alternative? We believethat there is an urgent need for the government to take a look at where the real dangersigns are and address those.These are all well known, and last month we had pointed to some, for instance, theneed to kick-start delayed mining projects. Recently, Coal India admitted that it isbeing constrained in production planning, thanks to the policy confusion; in effectproduction targets for the 12th Plan will not be as high as they could be. Double-digitgrowth and inflation in the 4-5% range is actually achievable, but fixing suchconstraints should be top priority now. Moving into the ‘8% is the normal’ outlook,and denting confidence is ensuring that the Indian economy continues to performbelow potential.Indicus AnalyticsContact Sumita Kale ( for comments.