A monthly newsletter on the Indian Economy by Indicus Analytics

1. Emerging Economy
Indicus Analytics
October, 2008
6 October 2008
Indian Economy Next Quarter
Kharif output lower than last year on all crops, except rice and jute.
Support prices hiked for crops – expect impact on prices ahead.
Fiscal deficit already more than 85% of budgeted target – set to grow.
FDI strong in construction and services sector this year – investment demand high in India.
India : Kal, aaj aur kal
While the world is fixed on the financial crisis, there has been little attention on the concerns coming through
on our agri front. Latest govt. estimates of kharif crop show negative growth over last year - this has
important implications for food, inflation and imports positions ahead. Except for rice and jute, all other crops
register lower output this year. What is interesting is the play of factors that has resulted in this situation.
Though the monsoon has been normal this year, this is a typical statement that shows the fallacy of
averages.
Kharif is the first crop season of the year, which accounts for little more than half the foodgrain output in the
country. (Wheat is a rabi crop, its output features in the winter season.) It didn’t rain when it was sowing time
for kharif crops in July in large parts of the country in the south and the west. With most of the crop rain-fed,
there was a heavy demand for irrigation though pumps. But on one hand there was a heavy power shortfall
and on the other ,with the crude prices going through the roof and govt. fuel policies upsetting the oil
marketing companies, diesel shortages prevented farmers from watering their crop at a critical time. Net
result: estimates of acreage sown are down for all crops except rice and soyabean.
And then it poured in August and September, causing damage in the fields. In our last newsletter we wrote
of the impact of the Bihar floods on agri output in India. Now the govt. has estimated 22 lakh hectares
affected across India with Orissa, UP, Andhra and Bihar leading in losses, others like Punjab, Haryana,
West Bengal, Assam etc, also figure in the list. This has affected rabi crop sowing this month as the soil is
waterlogged.
What could the govt. have done? These are problems created by long term neglect – dependence on rain,
lack of power, bad fuel policies that leave budgets bleeding, inadequate disaster management and weak
support policies..the list is long. Meanwhile the govt has hiked minimum support prices for all kharif crops by
huge amounts, there has been a 30-40% rise in MSPs. Announced well after the sowing season to influence
farmers decisions, this will have its impact on domestic prices. Prices are bound to be hit. Global food
markets are significantly influenced by India’s output numbers – possibility of imports by India raises prices
abroad. Coupled with a lower rupee and higher imports, the scenario ahead is clear to all.
P.S. We now begin our fourth year of this newsletter. It’s our aim to keep looking ahead and point out the
emerging problems and strengths in the economy. We would like to thank all our readers for their support
and feedback.
Sumita Kale & Laveesh Bhandari
6th October 2008, Indicus Analytics
Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can
be contacted at sumita@indicus.net & laveesh@indicus.net
Economic Growth

2. Indicus Forecast 2008-09 Agricultural output for the kharif season below last year’s levels on
GDP all crops, except marginal growth in rice and jute.
Total acreage sown is down by 2.3% due to bad timing of rains,
Agriculture
though there have been gains in rice and soyabean.
Manufacturing,Mining &Electricity The ABN-AMRO Purchasing Managers Index fell in September to
Services including Construction the lowest level since July 2007 - output, new orders and export
Month of Forecast : September 2008 orders all grew more slowly.
Another 9.03 million subscribers added on the telecom network raising tele-density to 29.83% in August.
Last year 8.15 million subscribers were added in the same month. Broadband subscribers now stand at
4.73 million.
Revenue earnings from freight traffic increased by 19.82% in the April-August period, and freight
carried increased by 8.62%. Last year in the same period, the growth was 9.85% and 6.95%
respectively.
Domestic air passenger traffic and cargo showed negative growth in July, 14.9% and 1.7% respectively,
though international passenger and cargo movement did rise by 9.4% and 4.6% respectively, showing a
slowdown in domestic air activity with fare changes.
Inflation
Consumer prices show hardening with CPIAL inflation for August at 10.29%, CPI IW at 9.02% and
CPIUNME for July at 7.39%- all higher than their previous months.
Wholesale price index continues high revisions of past numbers- inflation crossed 12% in June.
Provisional numbers put inflation in a declining trend since its high of 12.63% for 9th August week.
Latest provisional data for week to 20th August shows inflation at 11.99%.
The PMI survey showed a cool down in output price increases, though firms continued to face higher
input prices of fuel and raw material in September.
Crude oil swung lower down as demand in the US shrunk and the dollar strengthened.
WPI inflation is set to ease to 11% levels by the end of the year, provided crude does not spike again.
Read: Inflation: what the heck is it
Interest Rates
Benchmark 10 year gilt has come off the 9% highs of August as oil prices eased and global crisis have
led to hopes of rate cut in India in the October end monetary policy review.
While the gloom on growth and financial worries spread, there is a clamour of rate cuts in Europe and in
England, which will in all probability be acceded to.
In the US, however, debate is still on if further rate cuts will be the right response to the current
conditions.
Though the inflationary pressures have eased with crude oil crashing below $100 a barrel, inflation data
is still above the central bank comfort zones.
Money supply growth still at high 21% in India, not conducive to a cut in rates yet.
10 year yields will take cues from the global factors, and will range between 8-9% in the next couple of
months.
Read: Free Enterprise anyone?
Magic ring to save us may be accounting overhaul
Exchange Rates

3. Exports grew at 26.9% in August in dollar terms and 33.5% in rupee terms while imports rose even
more sharply by 51.2% in dollar terms and 59% in rupee terms.
Crude oil imports rose by 76.7% in August over last year while non-oil imports rose by 39.6%.
Trade deficit therefore was $ 49.14 billion in the period April-August, compared to $34.54 billion last
year.
Current account deficit on the balance of payments for the first quarter of the year rose to $10.7 billion
from $6.3 billion in Q1 07-08.
Net invisibles surplus stood at $20. 9 billion compared to $14.4 billion in the first quarter last year. This
was due to higher remittances and software growth.
$2052.40 million was the net outflow of FII equity in September as the financial crisis in the US pulled
money out of all markets. Since January, there has been a net outflow of $ 9120.50 million from the
Indian markets.
June FDI shows that highest FDI in the first quarter of this year went to construction activities ($ 5.8
billion), followed closely by the services sector.
While the dollar has been gaining strength worldwide, the rupee is close to 47 to a dollar, depreciating
almost 6% in September.
The rupee has depreciated against all other currencies as well as it has taken a hit from the outgoing
capital flows and high oil demand.
Rupee has been steadily losing value since January this year. With crude still higher than last years
levels and domestic demand strong, expect depreciation pressures to continue. Rupee to stay ranged
between 46 and 47.5 for the next couple of months.
Read: Anchoring Bretton Woods III