Emerging Economy Newsletter: Indian Economic Growth Insights

INDIA'S LEADING ECONOMIC RESEARCH FIRM

+91-11-42512400

products@indicus.net

Overall IPM

Graphs

Emerging Economy

7th March 2009

Indian Economy Next Quarter

	The organized sector reels under the slowdown ? will get worse this summer.
	Slowdown perceptible across economy - auto, cement, telecom bring small joy.
	As predicted RBI cuts rates reluctantly in March ? this effort will fail as well.
	Government bent upon making it worse ? resorts to highest ever borrowings.
	India rating crashes, set to fall further.
	Lower agri output spells bad news for prices ahead.
	Hardly any signs of turnaround yet ? but hope can sometimes carry the day.

India : Kal, aaj aur kal

We did say last time that if the RBI cuts rates, it would do so only in March ? that?s what happened, and as we expected (as did the RBI) the markets were not impressed. The monetary overtures were overshadowed by the grim news on the fiscal front, as the government put forth demands for the highest borrowings ever of Rs. 3.6 trillion. The flip-flop over the budget was particularly disturbing, as was the three times revision of borrowings over the year ? all with not a bit of apology. The problem is that under the excuse of ?exceptional times?, all that talk of moving towards controlled budgeting and market based pricing in fuel has gone up in vapour. Meanwhile, amidst all this turmoil, we don?t have a full time Finance Minister, a clear indication that the economy really isn?t a priority.

The quarterly GDP data is showing a sharp falling trend; even though we take this data with a pinch of salt, we would advise everyone to take the falling trend very seriously. International efforts are showing that nothing is working quickly enough, and we also know that no macro-economic models are working.

So what should the government do? When no one knows what to do, go back to first principles. The first principles are, spend your money where it has the most impact. But that is not what the government is doing, and is throwing away its money. It is trying to help the organized sector, by giving them all sorts of interest and tax advantages ? but these only help those firms that have orders. What about firms whose orders are falling or non-existent? These firms need a lifeline. The lifeline could be on the credit front, where the government can ask FIs to distinguish between company specific and structural/economy-wide shocks and resultant defaults. But there is no such move. As toplines fall, banks reduce credit for working capital ? but that is precisely when firms need more leeway. The list is very long.

Meanwhile, real estate firms are in deep trouble, and it is surprising that real-estate prices have not fallen more; this only indicates that the banks have restructured the terms of credit. In other words, they have delayed the bad news. The hope must be that, after a quarter or two things will improve; but they are sorely mistaken. This is not a short term slowdown for the real estate sector, and it is not going to see high growth for a long time. The more rapidly we correct the prices, force the companies to reveal the extent of the shock, the better it is for India?s economic stability.

Then there are those who think that the gvernment can spend its way out of this. The reasoning is, that since there is an international recession, prices will remain low, so we can spend as much as we want without fear of inflation. This is a flawed argument, if we spend large amounts, it will increase demand in the country, and to keep prices low, we will need to keep international trade very open ? that is, import more. The hit will then be taken on foreign exchange reserves (already down by USD 60 bill), and further impact our ratings if nothing else. The point is, to try and limit one loss, we will need to take a hit somewhere else.

The government also needs to ensure that when times do turn-around, India can access international funds ? but the large fiscal deficit has powered the downfall of our credit ratings, give it a few months and we will not be in the investment grade anymore. At that time, even if the world will want to invest in India, it will be unable to, as their regulations will prevent them from doing so. Do we have any credible policy measures in place to tackle this upcoming problem, or are we just hoping for the next government to bear the headaches?

Going ahead, while this quarter is still set to be a gloomy one, there are some small signs of spring-time joy, (Feb auto sales, price of copper at 3 month high, cement sales up, easing of loan rates from banks etc.) but it is difficult to read too much in these random data elements. Anycase, we do not foresee a smooth path ahead, returning to our recent 9% growth level is a government dream, if we can do 7%, we should be happy.

In April, two shows will roll - the IPL and the elections ? no prizes for guessing which one will boost sentiments more, which one will boost the economy more.

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

7th March 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

	GDP Q3 estimates showed slump in growth to 5.3%, slowdown in all sectors, and negative 2.2% growth for agriculture.
	Advance estimates of 7.1% growth given by CSO coupled with Q3 estimates released later implies an unlikely 7.5% growth in Q4 ? expect downward revision of this year?s growth.
	2nd Advance estimates for 2008-09 put agricultural output down by 1.26%, one of the few crops to show positive growth is rice.
	Sugarcane output is down 17% - explaining the rise in sugar prices.
	Manufacturing output has been showing a contraction ? IIP for December fell by 2%, with downward revisions in November data.
	Electricity is a sector that has been under-performing, showing the systemic failure of our infrastructure ? February generation was flat over last year at 0.25% growth.
	January infrastructure numbers show growth by 1.4%, compared to last year?s 3.6%. Again, cement and coal are holding up the show.
	Cement production grew by 8.5% in January, while despatches rose by 8.3%. February sales as reported in the newspapers are also up and promising.
	The ABN-AMRO PMI survey of 500 firms showed that there was another marginal rise in the index for February, over the last month, but still a contraction in the overall index.
	While auto sales picked up speed in February, firms are hesitant to call it a reversal in the falling trend. Except for Bajaj Auto, all two-wheelers saw double-digit growth in February, while car sales were high with Maruti and Hyundai leading the pack in growth.
	A record number of 15.41 million subscribers were added in the wireless telecom segment in January, as against the 10.7 million added in December and 8.7 million added in January 2008.
	Revenue earnings from railway freight grew at 12.85% in the April-January period, Net Tonne Kilometres rose by 5.78%, no significant change over previous year?s 12.34% and 6.74% respectively.

Read:

Click to leave comment

Inflation

	Consumer price inflation rose in January marginally with the CPI AL and CPI IW indices registering 11.62% and 10.45% rises respectively.
	The WPI continues on its downtrend, provisionally at 3.4% average for February.
	The NCDEXAGRI index of spot prices of agricultural commodities, which had plunged from its July highs, has been in a band since October, showing more stability, but all still at a higher level than last May.
	Crude oil has moved in the range of 39 to 47$ a barrel in February, leaving behind the low of $33.73 touched in end-December.
	Copper shows a similar bottom in the price chart so far, leading some like Mecklai to wonder if the bottom has been reached in manufacturing. Iron ore prices however continue to decline, reflecting diminished demand.
	Sugar has been hit by reduced output, prices rising by 15% in 3 months, with demands now for import of refined sugar to bring prices down.

Read:

Interest Rates

	High borrowing needs of the government and revised fiscal deficit of 6% of GDP for this year, with 5.5% of GDP estimated for 2009-10, has brought pressure on the bond prices, raising yields.
	RBI cut rates as expected early in March but need for higher borrowings keeps yields high.
	The 10 year gilt 8.24% 2018 Gsec rose to a high of 6.6415% towards the end of the month and then to 6.75% on March 6th, a 3-month high.
	RBI contracted transfer of MSS bonds to the government?s cash account to keep a lid on the rate rise.
	In the second week of March, central and state governments are set to raise Rs. 36,000 crores putting more pressure on the markets.
	Bank of England crashes rates to a record low of 0.5%, following the Fed, and begins quantitative easing ? unprecedented step of printing money.
	ECB cuts rates to 1.5%, warning calls of ?overshooting? (see reference below).

Read:

Exchange Rates

	Exports fell by 15.9% in dollar terms in February, rising by 4.2% in rupee terms, while imports grew by ?18.2% in dollar terms and 1.4% in rupee terms.
	Trade deficit rose to $444 billion for the period April-January compared to $ 269 billion for the same period last year.
	The rupee has taken a hit with funds pulling out of the country, with S&P?s placing India in negative rating category, coming close to 52 to a dollar.
	All currencies, including the Swiss franc have been beaten down against the dollar, as long as the dollar demand remains from the global banking system, expect dollar to stay strong.

Read:

debate: