Halfway into the year and where are we headed? Nowhere really. The concern continues to remain clearly focused on inflation that is just not going away, despite the repeated rate increases. While inflation has been declining in primary products, there has been a small uptick in recent months, and manufactured products WPI as well as consumer price indices show and will continue to show inflation persistence. The petrol price hike last month will of course add fuel to the numbers going ahead. The problem now is that the RBI has caught itself in a quandary - it has committed itself to further rate increases to curtail inflationary expectations, yet the prevailing uncertainty and volatility in the global scenario do not make this the best of times to further tighten the economy. And then there is this curious situation - if inflation is such a concern for the RBI, then why has the rupee been allowed to depreciate, further adding to inflationary conditions? In any case, by now it should be clear to the RBI, or rather to the government, hopefully finally, that inflation is not going to be impacted in the short run by monetary tightening. What is being affected is long term growth potential through reduced investment plans. Credit applications are at an all time low, investment plans have been put on hold, international investment plans are being accelerated in the corporate sector. So, paradoxically, what is needed the most by the economy - to maintain growth and fight inflation - is being curtailed. The HSBC Markit PMI for September came in lower at 50.4, as yet there is no contraction in India, while China has seen a small recovery. For us we know that demand impulses are still strong, not across the board anymore, but significant enough to reach the 8%+ goal of the government. The monsoon has been quite normal, with bumper crops expected now for rice, sugar, cotton, along with the high MSPs and government payouts, consumption demand from agri households will be boosted. When it comes to the negative indicator of declining car sales, September auto sales beat expectations with double-digit growth in almost all segments. Two wheeler sales continue to grow, despite all gloom, and Honda Motorcycles is going strong with its capacity expansion in a new plant to meet rising demand. Again, while on one hand we have lower than expected advance tax growth, on the other IATA data that showed India to be the fastest growing aviation market is backed by the news that corporate travel budgets have not been cut. The conducted by Indicus Analytics showed that overall the small firms were slightly more optimistic now about the next quarter, especially in food processing, where prospects have recovered to last year’s levels. Unfortunately, in the absence of any supply side moves, all this resilient demand will push into inflation. So the expectation that manufactured products inflation will reduce below 7% levels by December may get unstuck. What can we now expect in the coming quarter? Internationally, the Europeans will eventually figure out another band-aid solution, and the US is stuck with its own domestic compulsions, unable to do much - hence global uncertainty will continue and short term solutions will help us survive into the next quarter. More worrying is the domestic situation - the government and regulators have not only stopped functioning but are in reverse gear - now they are limiting how many sms we may send, figuring out a new communal harmony bill, have effectively killed investment by honest investors in the mining sector, have taken many steps back on the FDI front, and are under pressure to put-up yet another committee to rethink the poverty line issue. There seems little hope ahead and what is worse - astrologers predict no major planetary changes in the coming quarter. P.S. With this edition, we complete six years for this newsletter, we thank our readers for all their brickbats and bouquets over the years. Do continue with your feedback, thanks. |