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Emerging Economy

10th January 2011

Indian Economy Next Quarter

	Growth momentum to continue, estimated around 9% in 2011-12.
	As predicted, inflation data will trend down slowly over the coming quarter.
	Inflationary pressures persist, remain top priority for 2011.
	Food and commodity prices on up trend globally, domestic structural constraints worsen the situation for India.
	Rate hikes to continue, as RBI shoulders burden of inflation control.

India : Kal, aaj aur kal

Let us begin with the good news. Economic growth in India continues to present a happy story. Even if we take the highly volatile IIP, which has consistently shown lower growth since the peak of 15% growth in the Jan-March 2010 quarter, manufacturing is expected to turn in a 9% growth in 2011-12. The service sector is expected to grow by close to 11% next year, as trade, transport, communication, hotels, finance etc. are all set to continue their robust growth. Apart from all the usual indicators of production and economic activity, the improvement in the hiring indices across all sectors is a pointer to firms turning back to their expansion plans. Salary hikes are also on the way up, not yet to the peaks seen during the boom years, but significantly higher than the past year.

Now for the bad news. Though all inflation indices show falling inflation rates, as we, at Indicus, have been saying for the past two years, inflation is not on its way out. This will not be news to the households who are grappling with high price spikes in basic food and fuel goods, nor will it be news to companies who feel the pinch coming in back again through inputs and commodities, nor will it be news to the RBI whose eagle eye is forever trained on inflationary pressures ? it will however probably be news to the government, who has been seemingly unaware of the omnipresent pressure points in the system. Take the ongoing onion spike as a perfect example of apathy ? when un-seasonal rains hit crops, is it really so difficult to predict and take appropriate action against impending shortfalls in supply? Emerging onion short supply was well-known months back, corrective action could very easily have been taken then. Why did we not? And why does this happen repeatedly?

Now going ahead, crude oil prices have moved up, again a trend that has been on the cards for a few months now, cement, steel and other commodities have pushed up as well while prices in the auto sector and consumer durables are now set to factor in these rises in input prices.

To make matters worse, it is not just domestic prices but global food and commodity prices that are trended up. Whether it is sugar or iron ore, the story is the same, we are to expect higher prices ahead. Now in such a situation, is it feasible to look forward to a benign inflationary environment in 2011? We anticipate consumer price inflation to stay (at best) around the 8-9% range in the year ahead.

Clearly there are structural issues at play here that need to be dealt with, especially when it comes to food ? anticipating the implications of erratic weather, higher productivity, better storage, processing, market reforms, the list is long and well known. There are of course other reasons lending a hand to inflationary pressures, as we have said all along, the higher fiscal deficit necessitated by the crisis is one of them, government programmes that have boosted rural incomes through higher MSPs is another and so on. And then there is all the cash floating around as high government expenditures on infrastructure and social spending brings with it the baggage of what has always euphemistically been termed ?leakages?.

So the economy is heating, though thankfully it is under some control. But the RBI has a tough job ahead. Of course, a better fisc and efficient food management could make its life easier, but the government is either unwilling or unable to oblige.

Sumita Kale and Laveesh Bhandari

10th January 2011, 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

	IIP growth turned in at 10.8% for October over the previous year, manufacturing grew by 11.3%, mining by 6.5% and electricity by 8.8%.
	Infrastructure sectors grew by 2.3% overall in November. Crude oil at 17.7% and finished steel at 4.4% were the two highest performing sectors, while cement production was less by 11.6% compared to previous November.
	In December electricity generation grew by 4.34% over last year, according to provisional estimates by CEA.
	HSBC Markit composite PMI showed expansion at a slower pace in December, the index stood at 58.9 compared to 61.3 as both manufacturing and services had slower increases in activity.
	In October, telecom subscribers grew by 18.84 million, taking total telecom density to 62.51%.
	Auto sales continued with good growth in December. Maruti Suzuki India's total vehicle sales rose 17% over the previous year, Bajaj Auto rose by 10%, Hero Honda Motors' by 33%, TVS Motor Company's by 42%, Tata Motors sales increased by 30.63% while Ashok Leyland's total vehicle sales rose 23.86%.
	Area sown till 24th December under the rabi crop has risen by 2.7% for all foodgrains over the previous year, however there is a drop in area under rice, jowar and lentils. Similar rise in oilseeds sowing, except for decline in groundnut, sunflower and safflower.
	Air passenger movements rose by 10.7% in October over the previous year and freight by air rose by 22.9%, compared to 22.8% and 17% in October 2009 respectively.
	Cargo at major ports rose by just 1.1% in the period April-December 2010, compared to the previous year with significant fall in traffic at New Mangalore and Ennore ports.

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Inflation

	WPI inflation for November stood provisionally at 7.5%, while CPI IW and CPI AL indices turned in inflation at 8.33% and 7.14% respectively.
	However weekly estimates of WPI show primary food articles? inflation up at 18.32% for the week ending 25th December. The 52 week average inflation was highest for eggs, meat and fish at 31.03% and milk at 24.57%.
	In December, the FAO food commodity index rose to its highest level since 1990, surpassing the 2007-08 highs, wheat is at a 28 month high while sugar at a three decade high.
	Crude oil prices have risen over the past month, ending 15% higher in 2010 over the previous year. Global commodities in general are on the up trend once again.

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Interest Rates

	Yield on the 10 year gilt benchmark moved up marginally, averaging 8.109% in December.
	Yields are expected to be in the 8-8.5% range over the first half of this year as the RBI is expected to continue raising rates cautiously to deal with the inflationary pressures.
	Similar scenarios are expected in rates across Asia as inflation stays as the main concern for central banks.
	With Eurozone inflation stepping across the 2% ceiling for the first time in two years, the ECB is expected to raise rates this year, sooner than expected.

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Exchange Rates

	Exports during November were valued at $ 18.895 billion, 26.5 % higher in dollar terms (22.3 % higher in rupee terms) than the previous year. Imports were valued at $ 27.796 billion, up by 11.2 % in dollar terms (7.5 % in rupee terms) over the previous year.
	Oil imports during November were valued at $ 7.725 billion, 2.31 % higher than the previous year, while non-oil imports were estimated at $ 20.071 billion, 15.05 % higher than the previous year.
	The trade deficit for April - November, 2010 was estimated at $ 81.674 billion higher than the deficit of $ 68.375 billion during April ?November 2009.
	The rupee moved in the range 44.67 and 45.7 to the dollar in December.
	With a net investment of $ 29.361 billion in equity and $10.112 billion in debt markets in India, capital inflows helped curb a fall in the rupee as the current account deficit widened.

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