Emerging Economy Newsletter: Indian Economic Growth Insights

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Emerging Economy

5 August 2008

Indian Economy Next Quarter

	Expect inflation to go down albeit slowly to 7% by March-end.
	Inflation to move from 4-6% to 6-8% band for the next few years.
	Oil cools to early-June levels ? volatility to continue.
	Cereal prices to go down, great monsoons in north and east.
	Oilseeds, pulses, onions and tomatoes to heat up ? poor monsoons in south and west.
	Poor power sector performance plus credit crunch to affect growth severely.
	Oil imports, at 36% of total imports, put downward pressure on the rupee.

India : Kal, aaj aur kal

It was bad enough when top finance professionals showed their total lack of comprehension in calculating sub-prime losses, now central bankers are catching the ? I just don?t know? bug. With slowing growth and high inflation, US Federal Reserve Governor Bernanke summed up future outlook concisely as ?unusually uncertain?. Of course, many central banks are not getting much help from their governments, who are either busy rescuing overstretched financial institutions, or as in India are pouring money into fuel and food subsidies. Either way fiscal and monetary policies are at odds.

And why do we have double digit inflation when the West is getting away with just 4-5%? To begin with, the double digit numbers are in wholesale inflation. And actually India has been quite good at fighting consumer inflation if the numbers are to be believed. May-June CPI inflation in India is around 7-8%, comparable to Malaysia (net oil exporter and provides heavy subsidies), Brazil (uses local ethanol for transport), and China (with administered fuel prices). In China and Malaysia, which raised petrol prices recently, inflation has since risen. Inflation is much higher in other countries, precisely because fuel prices have been passed on - countries such as Russia (16%) Indonesia (11%), and South Africa (12.2%). The reason why India has done moderately well in consumer price inflation is simple ? it has not passed on price increases in oil.

Essentially, the Indian government has taken a call ? have longer term high inflation rather than a short term spike. Cutting taxes, raising subsidies, public sector bearing the costs, oil bonds, etc affect government finances. While such accounting jugglery and hocus pocus is politically expedient as all of us know, the impact will leak into the economy over the next few years. If other countries also take the same path, this may be all right; but if they do not, then the next few years will see a high inflation India competing with a moderate inflation world. As we have always said, taking the tough decision now will spare the pain later.

The government is not responsible for the inflationary conditions today. But it will be responsible for a highly inflation prone economy of the future.

Sumita Kale & Laveesh Bhandari

4th August 2008, Indicus Analytics

Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can be contacted at sumita@indicus.net & laveesh@indicus.net

Economic Growth

	The fourth estimate for agricultural production in 2007-08 has put foodgrain production growth at 6.2% over the previous year. While cotton production grew by 14%, sugarcane declined by 4.2%.
	IIP for May showed slow growth at 3.84%, while April?s data was revised downwards from 7.02% to 6.22%.
	Manufacturing grew at 3.9% compared to last year?s 11.31%.
	Infrastructure sectors grew at 3.5% in May over the previous year, with coal and crude oil, the only two sectors to show better performance than last year.
	ABN-AMRO?s PMI survey for July shows lower performance in output, new orders and export orders compared to the 4 month high of June.
	Electricity generation in July grew at 4.6%, compared to the 7.5% growth seen last July.
	In the auto sector, the first quarter of April-June 2008 saw a growth of 9.45% in production, 8.19% in domestic sales and 24.66% in exports. Not all segments had positive growth ? commercial vehicles export and three wheeler domestic sales and exports declined.
	Mobile connections continued to soar with 8.94 million subscribers added in June, bringing tele-density in the country to 28.33%.
	Railway earnings for the quarter April-June grew by 18.04%, with goods earnings rising by 22.1%.
	Fiscal deficit for the quarter April-June 2008 is 64.6% of the budgeted, this is due to front loading of expenditure and for the same quarter last year, the ratio was 74.5%.

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Inflation

	WPI provisional inflation was set at 11.98% for the week ending July 19th, a 13 year high. Final figures continue to be raised upwards, revisions to the May data have brought inflation from 8.15% to 8.72% already.
	CPI inflation moderated slightly in June with CPI IW inflation at 7.69% and CPI AL at 8.77%. However pressures continue to persist.
	The ABN-AMRO PMI survey for manufacturing firms showed firms raising output prices by passing on the rising input costs on fuel and metals, the index rose to its highest level since May 2006.
	Spot price for agricultural commodities on NCDEX dipped in the last week of July but are still about 5% higher than end-June levels.
	Deficient rains in western and southern India have upset production of sugarcane, onion, cotton, oilseeds.

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Interest Rates

	10 year benchmark gilt shot past 9% in July as inflation and crude oil data showed up at higher levels than before.
	RBI raised the repo rate by more than anticipated in its July end review to 9%, CRR to go to 9% by August 30th.
	In the US with low growth data rate hike is seen unlikely. Inflation outlook, put at being ?unusually uncertain? ahead.
	In England a three-way split in the monetary policy committee meeting, with one vote for a rate hike, one for a rate cut and the majority for a hold on rates, shows the uncertainty in the macroeconomic situation.
	ECB for Europe, Australia, Brazil etc. have raised rates so far this year while some like China have kept rates on hold.

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Exchange Rates

	Exports rose by 23.5% in June compared to last year to $14.66 billion while imports rose by 25.9% to $24.45 billion.
	In rupee terms growth was 29.7% and 32.2% respectively for exports and imports.
	Trade deficit narrowed slightly from May data to $ 9.79 billion.
	Oil imports which constituted around 36% of total imports in June, grew by 53.4% over the last year. Non-oil imports grew by 13.9% in June over the previous year.
	The rupee moved up into 42.8 levels by the end of July, having crossed 43 to a dollar in the early part of the month. Cues are still coming in from the crude oil prices and hence volatility is to be expected.

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