Emerging Economy Newsletter: Indian Economic Growth Insights

INDIA'S LEADING ECONOMIC RESEARCH FIRM

+91-11-42512400

products@indicus.net

Overall IPM

Graphs

Emerging Economy

4 November 2008

Indian Economy Next Quarter

	RBI slashes rates before and after the mid-term review, expect little else next few weeks
	Pessimism continues to rule though Sensex finds some support at 9-10,000
	Corporate sector cuts back new investments, hiring and marketing spends
	Crude collapses but fuel price cut not likely
	Govt. admits fiscal deficit target will not be met
	All financial and macro-economic models have become dysfunctional

India : Kal, aaj aur kal

October, what a dramatic month! Markets crashed worldwide, taking currencies down with them and creating what has been now been called a ?financial tsunami?. The madness of the media rivalled the madness in the markets as anchors squeezed out stories from the minute by minute ticker.

All of this was predicted few months back, and we were among those who did so as far back as November 2007 and repeated our concerns in Feb 2008. Indian policy makers however kept up with their pro-inflationary fiscal policies of increased government expenditure on the one hand and liquidity tightening monetary policies on the other. This is a familiar pattern and occurred in the 1990s as well - profligacy and inflation followed by interest rate tightening and growth slowdown. This time it is of course much worse, with the impact of the financial imbalances in the international economy.

This will result in a slowdown in Indian exports, and there will also be a slowdown in Indian investment growth especially in the corporate sector. We do not however expect any recessionary tendencies to affect India. Some sectors will no doubt be affected adversely, and the strong growth momentum will level a bit, India will however sail out of these troubled times relatively smoothly.

Among areas of concern, to inflation is now added financial and macro-economic stability. Given the rapidly changing situation, to its credit the government has approached this crisis in a mature manner. Increasing liquidity and reducing interest rates, strengthening of some institutions that appeared to be weak, and allowing markets to stabilize by themselves have significantly and positively impacted the long term confidence in Indian markets. This augurs well for the future.

Since inflation drives politics and economic policy in India, we would need to keep a close watch on it for some time ahead. On the one hand commodity prices have fallen dramatically, but so has the rupee, thereby reducing its anti-inflationary impact. Combined with a high budget deficit and potential mismatch in supply and demand of some food products (typically of the non-food grain variety), inflation will fall but not dramatically. Economists in the government would find it hard to convince the administrators and politicians to reduce interest rates further.

The PM and others have meanwhile supported ?pump priming? the economy through additional infrastructure investments by the government. Though infrastructure investments are generally welcomed, this would not be very helpful for the problem at hand. Since the money flows would only commence in a few years, when the worst of the growth slowdown would anyway have been over. Meanwhile large scale government borrowings would only reduce confidence in the intervening period.

There is only one way to strengthen confidence in India ? good fiscal management, and strong market based institutions. Improved monitoring, quality of regulation, and policy all need to be oriented to these, temporary hiccups notwithstanding.

PS: Alan Greenspan admitted that the Fed?s ability to forecast the economy?s trajectory was an inexact science, he said, ?If we get it right 60% of the time, we are doing exceptionally well.? True, 60-40 sounds a bit better than 50-50.

Sumita Kale & Laveesh Bhandari

4th November 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

Indicus Forecast 2008-09

GDP	8.0%
Agriculture	2.7%
Manufacturing,Mining &Electricity	6.7%
Services including Construction	9.8%

Month of Forecast : September 2008

	IIP for August crashed at 1.27% growth, a mere 1.15% in manufacturing. This is on a double digit base of last August, hence reflective of the slowdown.
	Electricity generation which grew at a measly 0.77% in August over last year, showed slightly better performance in September at 4.38%.
	ABN-AMRO?s PMI survey showed the lowest index in October. Biggest fall is in the new orders index, which projects lower output in the future.

	Auto production grew at 12.7% in the first half of the year, higher than last year?s growth. Sales of passenger vehicles grew by 7.53% while commercial vehicles grew at 3.79%.
	Auto exports did very well, growing at 27.4% growth in April-September period over last year.
	Cement production grew by 8.11% in September over last year, while despatches rose by 9.2%, higher than the 4.1% increase seen last September.
	In aviation, international passenger movement grew in August by 9.3% but domestic passengers declined by 17.1%. International cargo movement grew by 5.8% while domestic cargo by air barely grew at 0.1% in August.
	Foreign tourist arrivals up by 10.4% in the first half of this year, compared to 14.2% growth last year.
	Railway freight revenue rose by 18.9% in the period April-September while Net Tonne Kilometres grew by 9.60%. Growth during the same period last year was 9.77% and 4.88% respectively.
	10.07 million wireless subscribers were added in September, compared to 7.79 million last September. Broadband subscriber base is now 4.9 million and tele-density in India stands at 30.64% at the end of September.

Read: Inflation control chokes growth

Inflation

	Provisional WPI inflation finally fell below the 11% mark, for the week ending 18th October, sooner than we expected.
	Final estimates for August inflation continue high revisions coming precariously close to 13%.
	Inflation measured by the CPI for Agricultural labourers stood at 10.98% in September and 9.77% for CPI IW. Last September these were 7.89% and 6.4% respectively, showing hardening in inflation for the common man.
	Commodities have crashed worldwide, a good sign for inflation pressures ahead. Crude fell 25% in October, coming down to an average of $73 a barrel.
	Agri commodities on the NCDEX have shown a decline since the peak in July.
	However, with the sharp depreciation in the rupee, expect prices to rise in imported commodities like pulses, where stagnation in production has kept imports high.

Read:

Interest Rates

	With liquidity concerns hitting India, the RBI slashed the CRR by an unprecedented 150 basis points in the span of a few days.
	A cut before the policy review was followed by another slashing on a weekend, after the review, keeping the markets on the tenterhooks for decisions.
	CRR now stands at 6.0% and the repo rate cut to 7.5%, as growth and liquidity take on higher priority than inflation currently.
	Worldwide rates were cut - a coordinated move by the Fed, ECB, China, UK, Canada, Sweden, Switzerland on October 7th and the Fed cut again on the month end. South Korea slashed by the most ever, its first cut since 2001.
	The US has gone down from 5.25% to 1% over 13 months, and more is expected. Bank of Japan seems to be headed for a zero interest rate period again.
	Meanwhile there are others scrambling to rescue their currencies and raising rates: Denmark did so despite being in a recession, Hungary hiked by 300 basis points and South Africa, Romania seem to be likely contenders in the rate hike zone.
	Yield on the 10 year benchmark gilt dropped with the rate cuts and from the 9.4635 % high in July, is now at 7.5512 at the end of October.

Read:

Exchange Rates

	Exports in the month of September rose 10.4% in dollar terms and 24.7% in rupee terms while imports grew by 43.3% in dollar terms and 61.9% in rupee terms over last year.
	Oil imports had risen by 57.1% while non-oil imports grew by 36.2% in dollar terms.
	Trade deficit therefore was $ 49.14 billion in the period April-August, compared to $34.54 billion last year. Trade deficit in the first half of this year stood at $ 59.77 billion, higher than $39.1 billion last year.
	The dollar swung upwards in October, as the so ?called flight to quality led to a scramble to buy dollars ? the biggest monthly gain in 17 years.
	The pound fetched its lowest against the dollar since 2002, while the euro also took a battering.
	The rupee fell through 50 to a dollar briefly, a fall of about 7% in one month as money flowed out of the country, following the trend of stock market lows worldwide.
	The sharp change in the global environment has led to the fall in the rupee, and other currencies. Led by sentiment, rather than any fundamental change in the strength of the economy, estimating a level for the rupee now has more uncertainty. While the RBI is expected to tame volatility, trends can reverse as suddenly as they set in.

Read: