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6 Feb 2008
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 Indian
Economy Next Quarter
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GDP for 2005-06 and 2006-07 revised upwards ? India shone brighter
than we all thought.
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Slowdown in various sectors already established ? but whether 8.5
or 9, growth will be high. |
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The Fed cuts rates in panic as US economy slows down ? expect
muted impact on India.
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As expected by us RBI maintains status quo on interest rates, but
so have many other central banks.
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Crude expected to remain above $ 85, Indian government still
dragging its feet over hike.
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High tax collections so far, scope for budget to provide relief
for long overdue inflation correction of slabs.
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| India
: Kal, aaj aur kal |
| In our November 2007 newsletter we
candidly wrote ?At some point the negative international impulse will combine
with underlying inflationary pressures, impact of high rupee value, and high
interest rates. The large rises now will be followed by a large fall in the
stock market ? when that will happen, we have no clue.? We were quoted then in
papers with the conclusion that the bears are coming out of the woodwork. We
wonder - is it bearish to have our feet firmly on the ground? Anyway, it took
another couple of months and when the crash happened, it took everyone by
surprise, which incidentally is an intrinsic characteristic of crashes and
shouldn?t surprise anyone.
Growth estimates for the last two years were revised and raised by the Central
Statistical Organisation, in the process some of the numbers from previous
years have also been adjusted though not by much. Given the idiosyncrasies of
GDP numbers, even these raised estimates will remain provisional for another
couple of years, for now we continue to maintain our forecast for 8.4% growth
this year. Despite the first two quarters averaging 9.1% growth this year,
there are many indications of slower growth in the subsequent quarters ? rabi
acreage sown has fallen compared to last year in most crops so far, electricity
generation has already gone below our expectations, down to 4.6% growth
Oct-December 07 from 9.2% growth in the same period previous year, railway
freight earnings grew by 11.6% in the period Apr-Dec 07, compared to 16.9% over
Apr-Dec 06, while net tonnes kilometres of freight grew by 6.16% compared to
9.14% over the same two periods. Exports have grown by 7.74% in rupee terms
Apr-Dec 07, the sector grew at 28.65% for the period April-Dec 06.
Infrastructure sectors growth for Apr-Nov 06 has been 6% compared to 8.9% the
previous year with cement and steel showing poorer performance reflecting lower
growth in construction activity.
In the net, there is a slowdown that will be captured by government data in the
next few months. Unlike claims by most others we therefore do not see a 9% plus
growth rate this year. But we await the release of a few more numbers end of
this month before taking a more informed call.
Telecom is one sector that has shown better growth with higher monthly addition
of cell phone subscribers ? if the potential from this can be spun off for
other sectors, then we can expect a higher, more broad-based growth. But the
government?s handling of spectrum allocation in the recent past shows that
higher growth will remain a missed call. Meanwhile the government is quite
elated at the phenomenal rise in tax revenues and we expect a budget that will
please everyone.
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| Sumita Kale & Laveesh Bhandari |
| 6th February 2008 Indicus Analytics |
| Contact : sumita@indicus.net &
laveesh@indicus.net |
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Economic Growth
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Indicus Forecast 2007-08
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| GDP |
8.4% |
| Agriculture |
2.7% |
| Manufacturing,
Mining & Electricity |
8.5% |
| Services
including Construction |
10.1% |
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Month of forecast: October 2007
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GDP for 2005-06 has been revised upwards with growth at 9.4%,
earlier estimate was 9.0%. |
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GDP revised estimates show growth at 9.6% instead of previously
estimated 9.4%. Agriculture, Mining, Construction and Finance show positive
revisions, while Electricity and Community Services have downward revisions.
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As expected November IIP showed low growth at 5.3%, this is
building on last November?s 15.8%. IIP growth for the year so far is now less
than the double-digits at 9.2%.
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Manufacturing IIP grew at 5.44% - though this is a part of the
slowdown in activity, the actual numbers are exaggerated due to November 2006?s
high growth base. |
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Mining grew at 3.5% and electricity at 5.83% in November as part
of the low trend growth.
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IIP growth in capital goods continues at a healthy 20.8% for
April-November period (17.4% last year) and the slump has been in the consumer
goods sector which grew at 5.2% during the period(9.9% last year), negative
growth in August, September and November 2007.
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Infrastructure sectors, which have 26.68% weight in the IIP, grew
at 5.3% in November compared to 9.6% last year. Coal and electricity are the
only two marginally below last year?s growth, the other sectors are
significantly below. |
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Electricity maintains its low growth with 3.1% in January. |
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Telecom wireless continued with high momentum, adding 8.17 million
subscribers in December 2007 compared to 6.48 million in December 2006. Due to
cell phone growth, tele-density has risen from 17.16% to 23.89 % over the same
period.
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Railway freight earnings have risen by 11.62% in the period April
to December 2007 while tonnage carried rose by 8.22%
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Direct tax collection is up by 41.93% in the period April-15th
January, corporate tax by 37.22% and income tax by 50.15%. Tax deduction at
source increased by over 51%, while self assessment tax rose by over 59%.
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Winter rains have helped acreage grow but deficit with previous
year continues as on 1st February ? wheat sown on 27.6 million hectares
(compared to 28.1 same rabi period last year), rice on 1.98 compared to 2
million hectares, rabi oilseeds 8.8 million ha compared to 9.7 million ha last
year, rabi pulses 13.2 million ha compared to 13.8 million ha last year.
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| Inflation
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Steel producers raise prices by 8% in
February, raising the government?s hackles. Pressure from growing demand and
cut in production in China with power cuts due to unusual snow storms. |
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Crude continues to stay high around $90 a barrel and EIA, the
official energy statistics institute of the US government expects it to remain
above $85 over the first half of 2008. |
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The Economist commodity price index shows a 7.1% rise in food
prices just over the last month, with metals rising 7.0% as well in dollar
terms. |
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Consumer prices in India show inflation around 5 % - CPIAL 5.90%,
CPI UNME 5.07% and CPI IW 5.51%. This compared to 8.94%, 6.94% and 6.91%
respectively in December 2006.
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WPI provisional index has shown inflation rising up as food and
manufactured products have begun rising, standing at 3.92% for the week ending
January 19th. Upward revisions continue in November data. |
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Usually the WPI index falls in December, the seasonal effect, but
that has not happened this year, even though December data is still
provisional.
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Going forward WPI inflation is expected to rise to move into
4-4.5% band, towards 5% levels by March end.
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| Interest
Rates
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Markets were haywire in January - consequently our forecast for
interest rates went all wrong as the stock markets took a tumble all over the
world. However, by keeping the rates steady, the RBI has substantiated our
forecast of status quo in interest rates.
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The world is being pulled in different directions as countries
face prospects of high prices and low growth, central banks have to weigh
domestic and global repercussions ? a challenging task this year. Expect more
volatility in the first six months as markets make their way through the maze.
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The world is being pulled in different directions as countries
face prospects of high prices and low growth, central banks have to weigh
domestic and global repercussions ? a challenging task this year. Expect more
volatility in the first six months as markets make their way through the maze. |
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RBI is not the only bank to maintain status quo, some like
Australia and China have raised rates faced with soaring inflation. The
European Central Bank is holding out on a rate cut, though the markets are
expecting one sometime soon.
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The 10 year benchmark Gsec yield crashed all the way down to
7.3674 on January 23rd as bond prices soared due to crashing equity and
expectations that the RBI would follow the Fed?s aggressive cuts. The CCIL
traded the highest volume ever in outright Gsec transactions on that day ? Rs
21,967. 47 crores.
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Since then the yield has risen to cross 7.5% again. However, given
the uncertain and volatile nature of the markets, which is expected to have
factored in a rate cut by the RBI by April now, we expect the yield to move in
a broader range of 7.5 to 7.7% in the next couple of months as we believe that
rising inflation numbers will take their toll on the market.
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| Exchange
Rates
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Exports grew at 16.01% in December while imports grew at 18.1% in
dollar terms. In rupee terms, because of the falling dollar, the growth is much
less, exports at 2.54% and imports at 4.31%. |
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The trade deficit has grown to $57821.31 million for the period
April-December 2007 compared to $ 42852.20 million for the same period last
year.
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Oil imports during April- December were valued at US $ 49311.55
million, 11.68 % higher than during the corresponding period in the previous
year. |
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Non-oil imports during April- December 2007 were valued at US $
119559.46 million, 32.99% higher than during the same period previous year. |
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With no rate cut in India, it is anticipated that funds will pour
money into India as rates in the US have been dropping, however with the global
fund position full of uncertainty and balance sheet woes, this may not
materialise to the extent anticipated. Pressure on the rupee to rise is likely
to remain muted. |
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The rupee has been below the 40 to a dollar mark since September
2007 and has not dropped below 39 ? a tussle between the inflows and the RBI.
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The decline of the dollar is expected to continue at least for
another six months, putting upward pressure on the rupee, but thereafter growth
is expected to rebound in the US.
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In the short term, expecting RBI to continue its policy of
supporting the rupee, while the rupee could rise to 38.5 to a dollar, current
indications are for stability in value in the band 39-40.
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