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The Emerging Economy - October, 2009

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Highlights
• September rains bring fresh hope for rabi crop in the winter
• Inflation moves into positive territory, expect 7% by March end for the WPI
• Lacklustre export scene to continue as international recovery slow
• Infrastructure sectors show better performance than last year – construction on an upswing
• Exit strategies discussed worldwide, timing and pace to differ across countries
• RBI shows inclination to raise rates earlier than other economies to reign in inflation expectations


The festive season rolls in again and with it, the stock market is busy spreading cheer. IIP numbers, as we had expected are rising; the HSBC- Markit PMI survey confirms expansion in manufacturing activity in September with encouraging news on the new orders front. Vehicle sales are also up and as the mood sets in for rate hikes next year, credit markets are set to buzz once more. From this month onwards great times are expected at the consumer markets.

Exports though continue to reel under impact of international slowdown, August data shows decline of 19.4%. We can expect this lacklustre scene to continue through this year as global recovery is still slow, apart from a few specific sectors where large companies are diverting their international value chains towards India e.g auto sector where we beat China in exports earning rave reviews globally. In general, the up-trend appears to be quite well spread across the country, while Mumbai seems to be the most upbeat, on back of re-entry of international capital via FIIs. Rains finally did show up and conditions in the north-west are not as bad as expected a couple of months back. There are therefore great expectations from the rabi crop now.

One worrying issue that we have highlighted before is the growing Naxal activity. Naxals are a response to a non-functioning and badly performing state. The less one trusts the state to act in a fair manner, the more clout the Naxals get. There has to be a fundamental change in governance to strike at the roots of this counter-insurgency. Meanwhile, Naxals are concentrated in areas with large tribal populations, and almost all large projects in these areas are stuck. The government will be ‘forced’ to use greater force to counter the Naxals. But the point remains that rehabilitation has never been a priority for any government at the state or the centre, thus playing into the hands of the Naxals. The impact at the macro-level will play out with large projects being inordinately delayed because no one really trusts the promises of the government or private entities on rehab in any of the tribal dominated areas in the eastern states.

Last month we explained why it is not in India’s long term interest to tread the route of foreign loans even if the option looked attractive in the short-term. Sooner than we expected, though, the World Bank approved a loan of $4.3 billion in September – the second largest loan for a single country in a single year. Interestingly, this loan is said to be in support for India’s economic stimulus, a country that the World Bank itself projects to be fastest growing country in the world next year. Such support may be comforting to some but we reiterate: high fiscal deficit and a rising debt burden are hardly a recipe for sustainable growth.

We begin the fifth year of this newsletter and would like to thank all our readers for their feedback over the years. Please visit our homepage for updated interactive time series graphs of economic indicators and blog posts throughout the month.
Sumita Kale and Laveesh Bhandari
6th October 2009, Indicus Analytics
Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics.

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The Emerging Economy - October, 2009

  1. 1. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx The Emerging Economy – Monthly Newsletter from Indicus Analytics 7th October 2009 Highlights • September rains bring fresh hope for rabi crop in the winter • Inflation moves into positive territory, expect 7% by March end for the WPI • Lacklustre export scene to continue as international recovery slow • Infrastructure sectors show better performance than last year – construction on an upswing • Exit strategies discussed worldwide, timing and pace to differ across countries • RBI shows inclination to raise rates earlier than other economies to reign in inflation expectations The festive season rolls in again and with it, the stock market is busy spreading cheer. IIP numbers, as we had expected are rising; the HSBC- Markit PMI survey confirms expansion in manufacturing activity in September with encouraging news on the new orders front. Vehicle sales are also up and as the mood sets in for rate hikes next year, credit markets are set to buzz once more. From this month onwards great times are expected at the consumer markets.
  2. 2. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Exports though continue to reel under impact of international slowdown, August data shows decline of 19.4%. We can expect this lacklustre scene to continue through this year as global recovery is still slow, apart from a few specific sectors where large companies are diverting their international value chains towards India e.g auto sector where we beat China in exports earning rave reviews globally. In general, the up-trend appears to be quite well spread across the country, while Mumbai seems to be the most upbeat, on back of re-entry of international capital via FIIs. Rains finally did show up and conditions in the north-west are not as bad as expected a couple of months back. There are therefore great expectations from the rabi crop now. One worrying issue that we have highlighted before is the growing Naxal activity. Naxals are a response to a non- functioning and badly performing state. The less one trusts the state to act in a fair manner, the more clout the Naxals get. There has to be a fundamental change in governance to strike at the roots of this counter- insurgency. Meanwhile, Naxals are concentrated in areas with large tribal populations, and almost all large projects in these areas are stuck. The government will be ‘forced’ to use greater force to counter the Naxals. But the point remains that rehabilitation has never been a priority for any government at the state or the centre, thus playing into the hands of the Naxals. The impact at the macro- level will play out with large projects being inordinately delayed because no one really trusts the promises of the government or private entities on rehab in any of the tribal dominated areas in the eastern states. Last month we explained why it is not in India’s long term interest to tread the route of foreign loans even if the option looked attractive in the short-term. Sooner than we
  3. 3. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx expected, though, the World Bank approved a loan of $4.3 billion in September – the second largest loan for a single country in a single year. Interestingly, this loan is said to be in support for India’s economic stimulus, a country that the World Bank itself projects to be fastest growing country in the world next year. Such support may be comforting to some but we reiterate: high fiscal deficit and a rising debt burden are hardly a recipe for sustainable growth. We begin the fifth year of this newsletter and would like to thank all our readers for their feedback over the years. Please visit our homepage for updated interactive time series graphs of economic indicators and blog posts throughout the month. Sumita Kale and Laveesh Bhandari 6th October 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 • Industrial production showed 6.8% growth in July in the first estimates released by CSO. June output growth was raised from 7.8% to 8.2% in the first revision. • Infrastructure industries continued to shine bright in August with growth of 7.1% compared to 2.1% last August. Cement at 17.6% and coal at 12.9% were the star performers. • Electricity generation in September grew by 6.7% over the previous year, as per provisional estimates by CEA.
  4. 4. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Rains in September brought the gross deficit in the country down to 21% departure from normal. Yet, floods in the south have threatened to wipe out some of the gains. • The main crop to take the hit this monsoon has been rice, whose sowing was down 61.09% by 16th September. However, with late rains, the rabi crop is expected to do well. • The HSBC-Markit PMI survey showed an uptick in the manufacturing activity index in September to 55, new orders were also buoyant. • Auto sales surged in September as car sales reached a new high of 1.53 lakh units, higher than the previous high of 1.29 lakh units sold in March this year. – Hyundai posted its highest sales ever, Maruti at 11% growth, Tata Motors at 23%, Mahindra and Mahindra 37%, GM at 47% etc. while motorcycle sales also grew at a brisk pace. Hero Honda and TVS sold 4% more units in September, while Suzuki sales grew by 26%. • Indian railways carried 12.18% more freight traffic in August compared to last year. • 15.08 million new subscribers were added in the wireless segment in telecommunications in the month of August, bringing the teledensity in the country to 42.27%. • Naukri Jobspeak index showed a fall in hiring in August over July levels by 3.6%, however it appears that the general uptrend since April will continue ahead. • The Baltic Dry Index for Shipping has been extremely volatile over the last year, raising sufficient doubt about sustaining recovery in global demand from China. Read
  5. 5. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx EU debates crisis exit strategy Is Baltic Dry a harbinger of doom? Inflation • WPI provisional inflation went into positive territory from the week ending 5th September, however with sharp upward revisions to July data, it is likely that inflation was positive in August itself. • Consumer price data for August shows high growth with inflation at 11.72% for CPI IW and 12.89% for CPI AL. CPI UNME inflation for July stood at 13.04%. • These high levels of inflation follow the high prices rises in food commodities like sugar (44.5% yoy for WPI week ending 19th September), cereals (13.17%) and pulses (20.05%). Vegetables at 49.5% show the highest year on year rise. • HSBC- Markit PMI survey data for September shows output price index reaching a one year high, indicating that higher input prices are being passed on to consumers now. • Brent crude has been quite volatile this month, ranging between a low of $64.6 and high of $71.56 per barrel. While these levels are still 30% below last September’s prices, crude is still valued at double the December 2008 lows. Read UPA’s Marie Antoinette Syndrome
  6. 6. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Interest Rates • The 10 year benchmark gilt which saw 7.4397% yield on 1st September fell to a low of 7.0661% and climbed up slightly touching 7.1981% on 1st October. • While rate hikes are eminent the world over, the exact timing and pace would differ from country to country, depending on the growth and inflation scenarios. • Inflation in India has been pushed by primary articles but the PMI survey indicating rising output prices is not a comfortable sign for the RBI. Nor are the ‘back in favour’ stock market and realty offers. • On the other hand, non-food credit is still to look up, currently at half the levels of the previous year. • There is however a strong likelihood of the RBI being pushed into raising rates by early 2010 to signal their unwillingness to stomach year end inflation of more than 4-5%. Read Bonds should rally- RBI Deputy Governor Any HTM hike will be a blow to credit market Policy continuity at RBI Exchange Rates • Exports during August were 19.4% lower than last year in dollar terms (9.2% lower in rupee terms) while imports fell by 32.4% in dollar terms (23.9% in rupee terms). • Oil imports were lower by 45.4% in August and non- oil imports fell by 25.5%.
  7. 7. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx • Trade deficit for the period April- August stood at $38.17 billion, compared to $60.73 billion last year. • Balance of payments data for Q1 2009-10 shows that despite net invisibles surplus with buoyant private remittance inflows, the sharp decline in exports brought the current account into deficit of $ 5.8 billion(compared to $9.0 billion in Q1 2008-09). • Capital inflows showed a revival, especially foreign investments, bringing around the capital account from a negative balance in the last two quarters of 2008-09 to a positive balance of $ 6.7 billion in Q1 2009-10. • Portfolio investment turned from net outflows of $ 2.7 billion in Q4 2008-09 to net inflows of $ 8.3 billion in Q1 2009-10. • With positive inflows and a weaker dollar overseas, the rupee strengthened to touch 47.86 to a dollar on 1st October. • The dollar has fallen 14% against a basket of seven currencies since March but is set to rise, see Mecklai article below. Read The calm after the storm Giethner says ‘Very important’ to have strong dollar Recommendations Demand Curve :Cities of the West powering India Fe- Indicus Policy Series – Let coal be green How the states were ranked: State of the States 2009
  8. 8. Indicus Analytics, An Economics Research Firm http://indicus.net/Newsletter/Emerging_Economy.aspx Factbox: What it takes to rebalance the global economy Activation de l'équité et l'efficacité grâce aux enchères en Inde
  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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