The Curve Ahead

A Monthly on the Indian Economy and Consumer Markets
March, 2014
Unseasonal heavy rain hits crops across the country, agri output set to be lower than anticipated
IIP moving out of negative levels, yet will stay muted around 2% for the year ahead
Inflationary pressures remain, both in manufacturing inputs and in primary food items
RBI to keep rates on hold in April, possibility of rate hike in subsequent quarter grows.
The Indian Economy - On Hold

As the heat builds up with the oncoming elections, and expectations soar on the political front, the economy takes a backseat. There is hardly any good news on the economic front and expectations here stay the same i.e. low growth and moderately-high inflation to continue for the next quarter. Even as inflation data has been trending down slowly, households are not seeing much relief in their basic budgets - rural CPI is still going through double-digit inflation in cereals, eggs, fruits and vegetables. Going forward, unfortunately, the weather has played a big spoiler and price spikes are now expected in some basic food items, thanks to heavy unseasonal rain and hailstorms in March, across large parts of the country. Stormy weather, a month or two earlier than usual, has devastated a long list of standing crops- wheat, maize, gram, soyabean, mustard, sugarcane, vegetables particularly potato and onion, fruits etc. - and add to that the loss of cattle, poultry and other farm animals. The unruly weather is not a localised event but spread across many crops and in many parts of the country, this is bound to get the agri sector down and hit the growth estimates as well for the next quarter. Growth has actually held up to around 4.5% this year, thanks in large part to the high agricultural output estimates so far. This support will now see a setback; the final numbers of agri output will be significantly lower than the estimates as it will account for the actual harvest.

Then there are the latent pressures in input costs for the manufacturing sector. The gas price hike has been deferred for now; domestic steel prices have been raised twice this year, bucking the global trend of falling prices; the PMI survey for February reported the quickest rise in input costs in four months with increased metals, chemicals, textiles and energy costs; the new policy to pay for captive coal blocks will lead to pressures in steel, cement and sponge iron..and so on. Net net, even though the WPI inflation is low, this relief will be short-lived.

Sustained inflation has hit consumption hard as households try desperately to balance their budgets, and on the other hand, even as we have pointed out repeatedly that raising investment is key to raising growth, there is little evidence of any turnaround here. The Cabinet Committee on Investment that had been set up to push large projects through has so far cleared 144 stalled projects worth Rs 5.27 trillion, but 253 remain stuck, with a total worth of Rs. 12.82 trillion. In any case, projects take time to get off ground, even after the clearances. With deadlocks on so many large projects and with the political discourse during election season not even touching on this aspect, it is not clear what will happen after May. The tragedy of the economy is not that we are languishing at 4.5-5% growth, it is that we cannot look forward to better times in the near future.

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Economic Growth: Quarter Ahead Hit By Lower Agri Growth
The IIP numbers turned in a positive growth number for January, at 0.1%. However, manufacturing posted its fourth consecutive fall, declining by 0.7%. Over the ten months of this financial year for which IIP data are available, manufacturing has shown year on year growth only in three months. Electricity continues to be the only sector with high growth, with a 10.4% increase in generation estimated by CEA for February.
While the 2nd Advance Estimates for 2013-14 had set a 2.36% growth for food grains, the actual numbers will be significantly lower, due to unseasonal storms, including hail, in many parts of the country, across many crops. Wheat, pulses, sugarcane, fruits, vegetables etc. have been destroyed as well as cattle, poultry etc. The full impact will show in the revised growth estimates for the year.
With barely any change in bank credit, a pickup in growth is not anticipated in the near term. Non-food bank credit increased by 15.0 % in January compared to 15.1 % in January 2013. Agriculture and allied activities saw credit growth up by 13.2 % (17.1 % last year), credit to industry grew only by 13.6 % (17.2 % growth last year) while services sector saw a pick up at 17.3% growth (10.6 % last year)
Economic Growth
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Inflation: Current Lull in Data is Short-lived
Inflation numbers have been trending down, both WPI and CPI. At 8.51% Rural CPI inflation is still higher than Urban CPI inflation, 7.55%. Both segments continue to show double-digit high inflation in fruits and vegetables. With the unseasonal rains, spikes in prices can be expected in the following months, e.g more than half the onion crop has been destroyed in the prime district of Nashik, and prices can be volatile in the months of August and September as current stocks diminish.
WPI Manufacturing inflation has stayed steady at 2.8% in February, and is expected to move up gradually over the next few months. The Markit PMI survey has already shown that the input costs rose in February at the quickest pace in four months.
While the hike in natural gas price has been stayed by the Election Commission, Coal India has kept a 10% hike in coal prices on hold till post-elections. After mid-May, some uptick in prices is inevitable.
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Interest Rates: No Surprises From RBI
With the inflation data softening and growth prospects still looking grim, the RBI is slated to keep rates on hold in its April 1st review. Going forward however, a rate hike cannot be ruled out, as inflationary pressures do persist in many commodities.
There is status quo on other fronts as well – the fiscal deficit has been shown as within the target for this year and what will happen next year will depend on the government in place from May and the external balances are looking comfortable since low growth and restrictions on import of gold and silver have kept imports down to manageable levels. While there is no strong compulsion for a rate hike at this juncture, the events ahead will determine the rate trajectory further ahead in the year.
Interest Rates
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External Balances: Calm Only In the Medium Term
Exports and imports fell in February over the past year and month, exports by 3.67% in dollar terms over last year and imports by 17.09% in dollar terms over last year. The low conditions in the economy, and restrictions placed by the government, have led to a much more comfortable trade deficit.
While it is reassuring that that balance has improved significantly, maintaining this if and when growth picks up is another challenge for India. In particular, it is difficult to curb the insatiable appetite that Indians have for gold, that has also impacted financial savings by households. Unless growth prospects improve, inflation is low, financial savings will not seem attractive, thereby denting the long term investment potential from domestic sources. The situation therefore is deceptively calm.
The rupee has moved to its highest in eight months at 60.12 per dollar on 27th March, reflecting the growing confidence in the stability of the external balances in the short term. While the markets are expecting some stability in the medium term, it is still unclear how the year ahead will pan out on the political, and therefore economic front. Till there is some clear direction on the economic front, volatility in the exchange rate will be on the cards.
External Balances
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Indicus Price Monitor

The IPM data shows a slight uptick in primary item inflation. This can get aggravated over the next few months, thanks to the unseasonal rains that have hit many crops across the country in March. The commodity for the month, urad: Strong demand and lower supplies have led to rising prices of urad, which will be sustained going forward. While the rise in urad prices is not coming through very starkly through the WPI data, the all-India wholesale price of urad dal has risen steadily over the past eight months and has crossed the level of Rs. 6000 per quintal since February – such levels were last seen in 2010, when the crop had been hit by poor rains.

Indicus Price Monitor

IPM data till week ending 22nd March 2014. The Indicus Price Monitor, a product of Indicus Analytics Pvt. Ltd. tracks real time wholesale prices for 60 agricultural products from more than 3000 mandis across the country. Due to differences in methodology, the actual levels of the IPM differ from the corresponding WPI, however broad trends are in sync with each other. Available at