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Emerging Economy

3rd July 2009

Indian Economy Next Quarter

	Delayed monsoon spreads rapidly, MET deptt. hopes it will hold-up.
	Late monsoon and heat wave in June hits sowing for rice, oilseeds and pulses ? expect pressure on prices.
	Growth heading upwards, monsoon and the US economy could still be spoilers.
	Government shows intention of reforms ? implementation and governance issues remain stumbling blocks.
	Disinvestment is on the cards finally.
	Fuel price hike with no debate augurs well for deregulation.

India : Kal, aaj aur kal

The world is upbeat about India again. We are to be the fastest growing economy in 2010 at 8%, says the World Bank. So we finally get to beat China at the race, never mind that China is way ahead of us in per capita income and development indicators. In fact, this year, India is projected to be the only major economy to show a positive growth (2%) in steel consumption, according to the World Steel Association.

The Economic Survey 2008-09 also sees growth in the 6.5-7.5% range this year, assuming a normal monsoon and a bottoming out of US recession by September. This is in line with our growth estimate of 6.6% given a few months earlier. Returning to the high growth path of recent years however needs significant reforms, says the Survey and presents a formidable wish-list of measures. Suffice to say, this hope will not materialise in the near future.

But talk aside, inability to deal with upcoming risks is a serious failing of our policymakers. We had predicted, in our May newsletter, that crude would move away from the $ 40-50 range of the previous months into a higher range of $60-70, as expectations of global recovery became stronger. Crude did trade in this predicted range in the month of June. While we are glad that the fuel price hike took place this time with less fuss and without countless EGoM meetings, the fact remains that this hike does not cover the increase in petro costs fully.

This is just one of several sectors that require more efficient utilisation of public and private resources through free pricing combined with vouchers/entitlements to the deserving households for kerosene and gas. The Budget needs to focus on these issues as much as it does on taxation and government investment.

Our overall take on the forthcoming budget is that Pranab Mukherjee will not go in for another fiscal stimulus, but will aim to contain the deficit to 6% or below. There will be announcements of a new scheme or two, but their full implementation will be staggered over a few years (e.g. Food Security Act), ditto expansion of the social sector plans already in motion. Some tweaking on taxes aside, we think it would be too much to expect much beyond the usual from this Budget.

P.S. We have started a blog with contributions from Indicus and guest authors too, do join us at www.indicus.net/blog

Sumita Kale and Laveesh Bhandari

3rd July 2009, Indicus Analytics

Dr. 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 for April posted a positive growth of 1.4% over last year, while there were significant upward revisions in previous months estimates. March growth was revised from ?2.3% to ?0.8% and there is still one more revision to go for the final number for March.
	January IIP growth was revised to a final positive 1.0% from its first estimate of negative 0.5%.
	Infrastructure sectors showed a subdued growth of 2.8% in May compared to 3.1% last year. Good performance from coal(10.2%) and cement (11.6%) boosted the index, while crude oil and petroleum refinery products declined by 4.3% each.
	The Markit PMI survey showed a slight decline in the manufacturing output index in June, but still at 55.34 was above the threshold of 50 that separates expansion from contraction.
	Provisional estimates of electricity generation for the month of June show growth at 8.11%, compared to 2.55% last year.
	Media reports good auto sales with Maruti and Hero Honda leading the growth as before with 22.5% and 23.7% respectively. However, in June others like Yamaha, Hyundai, Tata and Fiat reported positive growth in sales.
	During May, revenue earning freight traffic carried by the Railways increased by 2.54% over last year. Revenue earnings rose by 2.34% in the period April-May over the same period last year, while Net Tonne Kilometres rose by 3.61% during April-May.
	Telecom subscribers increased by 11.44 million in May, bringing tele-density to 38.88% in the country.
	Hiring according to the Naukri Jobspeak was lower in May than in April, the index standing at 644 compared to 677 the previous month.
	Delayed rains and heat have hit sowing for oilseeds and pulses. Groundnut acreage sown was down 54.8% as on June 19th, compared to last year, while Moong was down 35.2%.
	Water level in reservoirs fell below the 10 year average in March and reached alarming levels by June with lack of rain. 11 reservoirs, primarily in Maharashtra and Karnataka have no live storage.

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Inflation

	While provisional WPI inflation fell in the negative zone in June, this was essentially due to the high base effect of last June, when the fuel prices had been hiked in the first week.
	While upward revisions to the WPI estimates began for February estimates, inflation for week ending 18th April was revised from 0.57% to 1.62% while inflation for week ending 24th April was revised from 0.7% to 1.75%.
	Consumer price indices also registered an upswing for May ? CPI AL rose sharply by 7 points over April, bringing inflation to 10.21% while CPI IW went up marginally to register 8.63% inflation.
	With crude oil prices moving into the 60+ range in June, even touching $ 70 a barrel, domestic petrol and diesel prices were raised from July 2 by Rs 4 and Rs 2 respectively.
	The Centre raised the statutory minimum price for sugarcane by 32% in the end of June, this should reflect in higher prices of sugar at the wholesale and retail level.
	FAO Food Price Index has fallen one third since last June peak but oilseeds and sugar markets remain tight as production setbacks have raised prices since last November.

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Interest Rates

	!0 year benchmark gilt yields have been rising since the end of April as the pressure of higher borrowings impacted the market.
	Government borrowing increased from the planned Rs. 241,000 crore for H1 2009-10, to Rs. 259,000 crore.
	Going forward, the Budget on July 6th will determine trends as the exact size of disinvestments and borrowings for the year will be set out.
	On the interest rate front, the RBI has been caught by mixed signals coming in on the inflation and growth front - CPI still registering high inflation, WPI showing low levels but an uptrend, manufacturing off the negative path but slow growth forecast ahead.
	A rate cut by the RBI of 25-50 basis points in the July end review could well signal the end to the rate cut cycle.

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Exchange Rates

	Exports fell by 29.2% in May compared to last year (18.4% in Rupee terms), while imports fell by 39.2% in dollar terms(30% in Rupee terms).
	Oil imports were lower by 60.6% while non-oil imports also registered a decline of 25.4% in May, reflected the slowdown in the economy.
	Trade deficit for April-May period was estimated at $ 10.2 billion, compared to $ 19.8 billion for the same period last year.
	With decline in imports, the current account deficit moved into surplus in the Jan-Mar quarter of this year, but stood at $29.82 billion for 2008-09, 2.6% of GDP, compared to $17.03 billion (1.5% of GDP) the previous year.
	Balance of Payments situation improved in the Jan-Mar quarter to show a small surplus of $ 300 million, compared to the $17.88 billion deficit in the previous quarter.
	Total external debt stood at 2 229.9 million at the end of March, compared to $230.85 billion at the end of December.
	Foreign portfolio investment has been flowing back since mid-March, which has pushed the value of the rupee up. It is now trading at 47.72 to a dollar, compared to the low of 52.2 in early March.

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