| 5 May 2008
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 Indian
Economy Next Quarter
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Inflation continues to rise, though at a
slower pace at above 7 percent ? world rates hitting highs, not set to moderate
soon.
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Global food crisis worse than credit crisis ? agriculture markets
need less intervention. |
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Time to re-examine oil dependent way of life?? crude crosses 110
dollars. |
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Government expects food-grain growth at 4.6%, but not as high in
wheat and rice.
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India record food grain production estimates for 07-08.
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RBI raises CRR to 7 year high at 8.25% ? expect more hikes over
the next six months if inflationary pressures do not reduce. |
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| India
: Kal, aaj aur kal |
| Inflation is playing out as expected,
domestic forces have levelled out and international forces are going to
continue driving it for the next few months. There is much talk and little
action internationally. Oil prices have to fall soon, and the US has to stop
diverting land and grain for energy, and only then can we expect some respite.
Inflation is currently being driven more by expectations of a bleak future than
supply-demand imbalances. Convince the world that oil prices will go down, and
convince the world that food will not be a constraint in the future, and
inflation will automatically fall. If solving the Iraq or Iran problems are not
possible then we need to get Russia and Saudi Arabia on board for a stable long
term oil price regime. But of course, that kind of leadership does not exist
internationally.
Why are things so bad particularly this year the world over? Two factors in the
main are upsetting the balance ? crude oil, crossed the highs of the 70s in
real terms now, and drought hit production in various countries, resulting in
wheat stocks at a 30 year low. Throw in the ethanol connection and you get
price spikes in food and dairy. Commodity prices for iron and steel etc. have
also zoomed up, again pointing to high demand ? unless capacity and efficiency
are raised, these kind of bursts will continue. The 70s stagflation is staring
at the world now but much has changed since then. Are we looking at double
digit inflation again? We would like to say a categorical No, but unfortunately
there are too many improbables happening to pretend this possibility doesn?t
exist.
So what?s the govt. to do? Well, one answer is to let the rupee appreciate and
take the hit on exports. Tighten its own expenditures that are wasteful, push
for productivity increases, push for mine and power sector reforms to increase
production, the list is long and unfortunately, repeated ad nauseum. But most
of the solutions will bear fruit a few years ahead. For now therefore, all
anyone can do is, build-in continued high inflation into all our plans. And
hope that Lord Indra saves us in June and July 2008.
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| Sumita Kale & Laveesh Bhandari |
| 5th May 2008 Indicus Analytics |
| Contact : sumita@indicus.net &
laveesh@indicus.net |
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Economic Growth
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Indicus Forecast 2008-09
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| GDP |
8.2% |
| Agriculture |
2.8% |
| Manufacturing,
Mining & Electricity |
8.6% |
| Services
including Construction |
9.6% |
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Month of forecast: May 2008
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IIP growth for February at 8.6% compared to 10.95% last February,
moderation shows in numbers.
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Manufacturing grew by 8.6%, high growth of almost 10% in
electricity due to last year?s low base.
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Electricity generation grew at 3.64 % in March, back on its trend. |
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Third advance estimates for 2007-08 agricultural production put
food grain output at a record 219.3 million tonnes, up 4.6% from last year. |
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Wheat up by 1.3%, rice by 2.5%, high increases in maize and bajra.
Oilseeds up by 16%, higher than 2005-06 record as well; Sugarcane output down.
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Forecast for monsoon is a good one so far, but as usual, the
picture will be clear only by July. |
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ABN-AMRO PMI index shows lull in April manufacturing activity,
same as in March, the lowest since last July.
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Railway freight earnings grew at 13.86% in 2007-08, moderating
from the 17.5% growth last year. However, March 2008 showed good performance
with growth at 18.22%, compared to 15.5% last March. |
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10.16 million subscribers added on cell phone network in March,
tele-density now crosses 26%.
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| Inflation
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With crude staying above $ 110 a barrel
levels, it is 67% more expensive than last April. |
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Political tensions rise as food prices rise in the world ? Bush
blames India for eating more than ever before. World food stocks at 30 year
lows. |
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Rise in non-food primary articles like iron and steel hit nations
worldwide. Measures in India are still to take effect ? reduction in excise
duty, export tax on steel etc.
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PMI survey shows pressure on input prices for firms is sustained
in April.
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NCDEX agricultural commodity spot prices have been declining since
March, but are still way above the lows in October. |
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CPI inflation for India spurts for March ? 7.87% for CPI IW, 7.91%
for CPI AL and 6.02% for CPI UNME. |
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WPI provisional index shows 3 year high of 7.57% inflation for the
week ending 19th April. Persistent high revisions to February data have brought
inflation past 5% for that month. |
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With revisions to data, the forecasts for the next few months have
been raised considerably higher than earlier. Inflation set to stay above 7%
levels for the next two months, unless the control measures start taking
effect. Yet, May inflation has a high probability of crossing 8% mark. |
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| Interest
Rates
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As anticipated, 10 year Gsec benchmark rose past 8% in April and
has come back below 8% by end of the month.
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RBI raises CRR to 7 year high of 8.25% but left other rates
untouched, eye on domestic factors rather than global now.
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Markets have now understood the inflationary pressures and are not
looking for rate cuts anymore.
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Fed cuts rates again, pause expected now.
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Asian banks are looking at rate raises and battling tradeoffs on
the monetary policy front.
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Expect 10 year Gsec yield to range between 7.9 and 8.1% in the
month ahead, easing if inflation numbers ease.
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| Exchange
Rates
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Exports up by 26.6% in March in dollar terms, 16.04% growth in
rupee terms. Imports meanwhile grew by 35.2% in dollar terms and 24% in rupee
terms.
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Much of this import rise was due to crude oil purchase, up by 77%
in March over last year, non-oil imports grew at 18.7%.
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Net trade deficit rose to $ 80.4 billion for the period Apr-Mar,
compared to 4 59.3 billion last year.
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Rupee stayed around 40 a dollar for most of April and swung down
to lower levels at the month end with purchases by oil companies as is normal. |
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With high prices of crude oil, pressure is there on the balance to
push the rupee to depreciate, though there has also been pressure from RBI
activity buying dollars reported for February. |
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Expect rupee to stay in the 39-41 range, downward pressure coming
in from crude oil.
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