April 2013

2nd April 2013,
Indian Economy Next Quarter
Slowdown deepens as UPA grapples with message for next elections.
No change in domestic drivers, growth this year hinges on monsoon and global recovery.
Growth expected in 5.5-6% range this year
Consumer inflation to stay in double digits, despite WPI dipping to 5%.
Economy very susceptible to international shocks.
India : Kal, aaj aur kal

The economy is going through a bad patch, and at times like these, the question that comes to mind is whether there is something to look forward to ahead. The negatives have been in place for some time now – sustained inflationary pressures, large fiscal and current account deficits, low credit growth, depressed global environment etc. all feeding into each other. On some accounts though there may be hopes of a small turnaround in global growth and as a buzz builds, a reversal of business sentiment can well come into place in India. While on one hand there is ample anecdotal evidence that things are picking up, estimates from the IMF, OECD etc also confirm the higher likelihood of the world economy doing better this year than the last. Of course, there are serious concerns that persist and we are still far away from any certain breakthrough, yet it must be noted that global expectations are changing around slowly.

Meanwhile at present the conditions within India are not encouraging. With the budget behind us and the election year promising little for policy reform to revive industry, domestic worries are high. Despite the moderation in the WPI, especially in manufacturing inflation, the stresses in primary items continue to come through strongly in the official consumer price indices that have shown higher inflation over the last four months. The Indicus Price Monitor that tracks agri commodity prices in real times shows a similar trend, i.e. overall moderation since December yet high levels continuing through March. There is significant pressure in cereals and pulses, oilseeds etc. that is not quite set to come down in the near term. So with current trends, the dip in headline inflation will not continue beyond the second quarter of this year, the average inflation will still be 7% this year.

With the RBI’s high sensitivity to inflationary pressures, therefore, rate cuts will be kept to the minimal, just enough to keep the government off its back. Though the commitment to lower fiscal deficit has been indicated, caution will prevail within the central bank. In any case growth is unlikely to be kicked off through rate cuts, credit growth is currently lower than what it was last year and industry sentiment and expectations for the long term need to be targeted. Though the HSBC Markit PMI shows expansion in new orders even in March, these were at the lowest level in 16 months, the IIP will average around 3% over the year as domestic growth drivers are missing.

Talk of double digit growth is now forgotten and we are paying the price of the excesses of the past years. We are stuck in a high deficit low growth phase; unfortunately the government keeps cueing policy and even industry towards welfare measures, while measures that raise productivity and employment are actually much more crucial. Until this signal comes through, even the 8% growth target will remain elusive.

P.S. Indicus has been tracking real time prices for 62 commodities over the past year and the indices are now available live on our website.

Sumita Kale and Laveesh Bhandari

2nd April 2013, Indicus Analytics

Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it. and This email address is being protected from spambots. You need JavaScript enabled to view it.

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Economic Growth
Provisional IIP for February put overall growth at 2.4% over the previous year; manufacturing grew by 2.7%, electricity by 6.4% while mining output fell by 2.9%.
The core sector numbers for March were not good with five out of eight sectors showing a decline in production over last year. The two worst performers were natural gas and coal whose output fell by 20.1% and 8.0% respectively, while the two best performers were refinery products and cement whose output grew by 4.3% and 3.9% respectively.
HSBC Markit Manufacturing PMI for March was 52, lower than the previous month with growth in new orders expanding at the slowest pace in 16 months.
While urban telecom subscribers dipped by 4.41 million in January, rural subscribers increased by 2.05 million; total telecom subscribers fell by 0.26% over the previous month’s number.
Cumulative pre-monsoon rainfall in the first three weeks of March was 61% less than the LPA. Rabi sowing till 22nd March was higher by 9.8 lakh hectares over the same period last year, with the highest positive gains in gram and rapeseed-mustard. However, basic cereals showed lower sowing by 3.4 lakh hectares.
Apart from SUVs and utility vehicles, the auto market saw a slump in March over the previous year, with sales from Tata Motors falling by more than 20%.
   
Read:Indian economy: Where’s the recovery?
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Inflation
Provisional inflation in WPI was estimated at 6.8% in February, marginally higher than the previous month.
Manufacturing products inflation was estimated at 4.5% and Fuel and power at 10.7% inflation in February. Primary items inflation at 9.7% was lower than the previous month.
Consumer inflation was estimated at 12.1% for CPI IW and 12.7% for CPI AL in February, both higher than the previous month.
Crude oil ended March at $ 107.18 per barrel (Rs. 5829.52) compared to $109.74 per barrel (Rs. 5908.4) at the end of February.
Read: India consumer price inflation among the highest in the world
Read: Non-subsidised cylinders yet to be added in inflation numbers
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Interest Rates
The yield on the 10 year benchmark gilt rose marginally in March, the average yield was 7.8937 compared to 7.848% in February.
The RBI came through with a 25 bps cut in the repo rate in its March policy review and another 25 bps cut is expected in the May review.
Read: India Inflation Fight Hampered as Debt Role Hinders RBI
Read: When Interest Rates Rise
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Exchange Rates
Exports during February were valued at US $ 26259.36 million, 4.23 % higher in $ terms (13.99 % higher in Rs. terms) than last year while imports were valued at US $ 41181.65 million, up by 2.65 % in $ terms and 12.27% cent in Rs. terms over last year.
Oil imports during February were valued at US $ 15148.3 million, 15.45 % higher than last year while non-oil imports at US $ 26033.4 million were 3.57 % lower than last year.
The trade deficit for April- February was estimated at US $ 182090.41 million, higher than the deficit of US $ 169814.26 million during the same period last year.
The rupee averaged 54.4046 to the dollar in March, lower than the 53.77 average in February.
Read: Like Rate Cuts, Unconventional Easing Weakens Dollar: Fed Study
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Indicus Price Monitor

Tracking inflation in real time

The real time monitoring of primary food items at Indicus has consistently shown the pressure on prices in various commodities – oilseeds, pulses, potatoes and so on – before they turn around in the WPI. As has been mentioned before, due to differences in methodology, while the levels of inflation and index may differ between the Indicus Price Monitor and the WPI, the broad trends are in sync with each other.

Jute is an important cash crop for states in eastern India; grown in the kharif season, West Bengal and Bihar are the leading producers. The output of jute averaged 101.1 lakh tonnes annually in the last decade and hit a record 112.3 lakh tonnes in 2009-10, falling thereafter. The 2nd Advance Estimates for 2012-13 have set production at 105.59 lakh tonnes, 1.6% lower than the previous year. Following the dip in inflation due to the record crop, prices have moved up since and jute has stayed with high double digit inflation since last July. The crop has received significant backing from the government, with the MSP raised every year. Yet the output has not kept pace with the demand, given the mandatory jute packaging regulations and at present there is a shortage of supply of jute bags this year to store foodgrain stocks. The MSP has now been increased to Rs. 2300 per quintal for 2013-14, a 4.3% hike over the previous year and price pressures are expected to be sustained for jute this year.

Indicus Price Monitor

The Indicus Price Monitor currently tracks real time prices for 62 commodities that make up 20% share of the WPI. The coverage of items is being expanded to provide a comprehensive indicator for price information in India.

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