August 2009

  6th August 2009
Indian Economy Next Quarter
Rains still not favouring India?s granary in the northwest, August rains key now
Pressure on pulses prices set to ease with imports and higher crop by winter
RBI holds rates, but inflationary pressures will force its hand by last quarter
Commodity prices set to rise as global growth signs turn more positive
High government borrowings pushing bond yields upwards
Subdued dollar as emerging economies show more promise this year
India : Kal, aaj aur kal

As we have been emphasising in the past few newsletters, despite the negative WPI inflation numbers, all is not calm on the inflation front. Right now attention has focused on inflation in food articles and manufactured food products, standing provisionally at 9.7% and 8.5% for the week ending July 25th. Consumer price indices for June are also registering higher inflation than previous months, CPI AL for instance stands at 11.52% inflation; this is on top of the 8.77% rate in June 2008. Clearly, the government?s ?touchy feely? talk on being the saviour of the poor has been negated by inflation. Could the government have done anything different? We believe it could have and should have. By preferring to reduce emphasis on the consequences of a high fiscal deficit on inflation, the government has done a great disservice to the country.

This quarter?s story will be repeated for many quarters to come. Though the focus on price rise will change from product to product over time, there is no doubt that we are heading for higher levels of inflation in general. Right now the story is about pulses, and within that mainly tur. Prices of tur or arhar have risen 45% in the WPI since Jan, other pulses are in double digit rises, except gram. The problem with tur specifically is because last year?s output was 25% lower than the previous year. But tur being a crop that survives when rain is inadequate, going ahead, the high prices and low rain have already raised acreage sown under this crop this year. Import tenders have also been floated, pressures on the prices of tur will therefore lessen by winter. Meanwhile rain is still deficient in the granary of India, but stocks of rice and wheat are high. The problems therefore appear less this year but will aggravate in the year ahead, especially if rains fail the Met prediction in August.

As we have said time and again, the time is past for just pushing money in the hands of people, without raising production and productivity levels ? If Punjab and Haryana get through this poor monsoon with a halfway decent crop, it will be thanks to the irrigation systems set in years or decades ago. So what can a soft-hearted government do?

Economic policy requires hard headedness at its very foundations. Want to give 100 rupees to the poor? Go ahead, but get Rs. 100 productive asset out of it. Want to give more money to government servants? Then get them to deliver that much. And it is possible to do so. A large majority of government staff provide services of some type ? education, health care, water supply, safety and security, justice, etc. Their output is measurable and it is possible to link salary increases with their output improvements. And all of these have direct productivity benefits for the country. But we hear of no such talk. What is this government scared of? It has no opposition.

Issues of inflation, upward pressures on interest rates, weakening currency apart from pressures on the fisc are here to stay for many years to come. The point is we are stuck with higher levels of inflation in the year ahead, the RBI has already raised its estimate to 5% and will need to raise it further still as time goes by; one after the other, more spikes will be seen in some products which might eventually abate, but overall inflationary pressures cannot be wished away. As global growth picks up, prices of commodities will also pick up, thereby impacting the manufacturing sector pricing as well. It is better we are prepared for all of this. Governments internationally had gone in for unbridled spending in the past, hoping that growth will create a pie large enough, but when that did not pan out, the poor and underprivileged had to suffer the most. Soft-heartedness and hard-headedness can go together.

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Sumita Kale and Laveesh Bhandari

6th August 2009, 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
IIP showed subdued but better growth in industrial sector in May at 2.7% provisionally, with February?s growth was revised upwards from the initial negative 1.2% to a final positive 0.7%.
Infrastructure sector performed well in June, raising production by 6.5%, as compared to the growth of 5.1% last year ? cement, electricity, crude oil and coal outdid their previous year?s growth rates in June.
The Markit PMI Survey shows July output levels in the manufacturing sector at similar levels to June, the index stood at 55.3 indicating growth. The new orders index rose to 59.75, the highest level in nine months.
The Fourth Advance Estimates for 2008-09 agricultural production puts growth in foodgrain output at 1.3% higher than the previous year, compared to the last estimate that showed negligible increase in output.
Wheat production is now estimated higher in 2008-09 by 3%, compared to the previous estimate of a decline by 1%.
Pulses output fell by 0.7% as tur took a substantial hit last year, sugarcane fell by 22.1%, cotton by 10.5% and groundnut by 23.4% - putting pressure on prices of these commodities this year.
Cement production in June rose by 13.01% while dispatches rose by 12.84%.
Media reports indicate that Maruti sales rose by 33.36% in July over the last year, Mahindra and Mahindra reported vehicle sales growth by 22.04% while Honda car sales rose by 11.99%.
Rail freight traffic increased by 9.59% in June over the previous year, higher than the 7.81% growth clocked in June 2008.
Data from Airports Authority India shows that international passenger air traffic to India has picked up, rising by 3.9% in May over last year, while domestic passenger air traffic has continued its decline by 5.9% over last May.
Domestic freight however has risen by 3.5% in May over the previous year, while bad export markets continue to dog international freight, which declined by 4.3% in May 2009.
Hiring in companies increased in June, over the previous month, according to the Naukri Jobspeak Index, which began conducting the survey in July 2008.
Rains in July increased the water levels in the 81 storage reservoirs monitored by the CWC, however, storage levels are still less, at 78% of the 10 year average.
Except for tur dal, maize and cotton, most crops are reported lower acreage sown so far, bringing the total kharif acreage sown by 24th July to 7.9% less than the area sown the previous year.
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Provisional WPI estimates put inflation for the week ending July 25th at a negative 1.58%. However significant upward revisions have raised May inflation estimates by one percentage point.
In June consumer price inflation rose, with the CPI AL recording 11.52% yoy and CPI IW at 9.29%.
NCDEXAGRI index of spot prices of agricultural commodities has risen by 8.35% over the period 11th July-1st August.
Prices of tur and sugar have been rising over the past six months on lower production last year.
International crude oil prices climbed down to touch $58.25 a barrel on July 13th, but have since risen in the range of 65-70 by the end of July, on positive global economic data.
Read: When will tur dal touch Rs. 100/kg?
Read: Anxiety over food inflation
Interest Rates
The 10 year benchmark gilt touched a low of 6.7978% on July 17th but rose again to 6.9691% on July 31st.
While the RBI kept rates unchanged in its July end Credit Review and signalled intention to maintain an accommodative stance in liquidity, there was emphasis on the need to begin withdrawing the looser credit policy, in tandem with the government fiscal stance.
Rates therefore are seen to edge upwards by the end of the fiscal, if growth and inflation estimates move higher.
High government borrowing, higher oil prices and a build up in inflation will put an upward pressure on bond yields.
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Exchange Rates
Exports in the month of June were 27.7% lower than the previous year in dollar terms and 19.4% lower in rupee terms, while imports fell by 29.3% in dollar terms and 21.2% in rupee terms.
Oil imports were 50.6% less in June compared to the previous year, while non-oil imports fell by 16.5% on account of slower growth this year.
Trade deficit for the period April-June 2009 stood at $15.5 billion, lower than the $28.6 billion last year, on account of lower imports.
Forex reserves which had been falling due to capital outflows with the global crisis have now an upward trend since April, rising to $ 267.71 billion as on July 24th. This is higher by $15.73 billion compared to March end and lower by $38.89 billion over last July.
The dollar traded at its lowest against the pound and the euro this year, on better than expected economic news from Europe.
The rupee ranged between 48 and 49.5 to a dollar during July, as upward pressure has been curtailed by the RBI and a subdued dollar.
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