August 2012

1st August 2012,
Indian Economy Next Quarter
Drought situation puts additional stress on growth and inflation
Slow down to get worse with less than 6% growth and more than7% inflation forecasts
Rupee bears the stress as domestic and international conditions continue to be adverse
Inadequate forex reserves will not allow for cushioning the impact of deprecating rupee
Chidambaram sets out well- can the dream maker get us out of this nightmare?
India : Kal, aaj aur kal

India is facing a drought. Official declaration would of course emerge over the next fortnight and though the situation may improve in parts of the country, there are many that are already in dire stress. There was somewhat of a drought in 2009 as well. What has been particularly striking this year is that the water storage in the dams was much better during the monsoon of 2011 than it was in 2008 - the rapid decline in the water levels in November to below the ten year average should have alerted our policy makers much earlier. Ironically, despite cities and villages reeling under the lack of water this year and with all food grains reporting lower acreage sown till the end of July, the only crop that stands out with higher acreage sown this year compared to last year is the water guzzler sugarcane.

That should make complete sense to a government that has in the first four months already borrowed 42.51% of this year's target for borrowing. Actually, the government has recently said that borrowings are likely to be lower this year, but such talk will inspire no one. Where is the sense of restraint? Where is the sense of urgency that should come through from a government that is facing a drought, an uncertain and unhelpful global environment and dipping industrial growth numbers? There is a serious drought of action, and we need some real men in positions of power. Mrs Gandhi has done well to put Chidambaram back in the FM's seat. The RBI needs some overhaul as well - where are the forex reserves that India desperately needs to protect itself from impending international shock?

Building the economy does not seem to be a priority at all. Now the Roads and Surface Transport Minister has also gone on record saying that the target of building 20 kilometres of road a day is not possible for another three years. All in all, the inaction on so many fronts is costing the economy dearly in the long run, a point that we have noted often before in our columns. What we are left wondering now is, what will it take for the economy to get going again? The RBI is not planning to cut its rates, the world is not going to turn around miraculously, hopes of a recovery are receding as the months go by and the growth forecast remains in the 6% range this year. In other words, investment and growth now actually outrank inflation as matters of most concern.

Let us look at the official IIP numbers that have turned in an overall negative growth three times in the past twelve months. What has been particularly worrying is that despite all the volatility, the capital goods sector has shown much lower growth, negative in nine months out of the last twelve for which data are available. There has been precious little policy action on this front. In fact, not only has there been little policy action, the discontinuation of data release of item-wise IIP production shows that this government would rather cover up problems than fix them.

Despite the hawkish monetary policy, inflation continues to reign high and the RBI has upped its forecast to 7%. It is clear to everyone that food prices are a problem, as Indicus Price Monitor has been showing. When it comes to fuel, instead of decisive action, we see just small fuel adjustments that tinker with the system even as the price of crude increased over the past month to cross $100 a barrel. Though the rupee appreciated slightly over the past month, over the year ahead, volatility for the rupee will be a given, since global factors and risk perception will drive the currency. The country has to be prepared for the consequences of a fall in the rupee since now we know the RBI can’t protect it much.

So growth is set to be down, inflation is set to be high, rates will not be lowered, and investment plans look dim. Is there anything to look forward to? Well, for what it's worth, we have a new Finance Minister!

P.S. Indicus has been tracking real time prices for 63 commodities over the past year and the indices are now available live on our website.

Sumita Kale and Laveesh Bhandari

1st August 2012, 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 growth in May was estimated at 2.41% higher than last year, manufacturing grew by 2.5%, mining fell by 0.9% and electricity generation increased by 5.9%
Among core sector, cement and electricity were the star performers in June registering growth of 10.2% and 8.1% respectively, while fertilizers and natural gas production fell by 11.7% and 11.1% respectively over the previous year.
In July the manufacturing sector HSBC-Markit PMI fell to an eight month low of 52.9, due to power cuts, weak new business orders and fall in export orders as global demand declined.
The headline HSBC Services Business Activity Index posted 54.2 in July, down from 54.3 in June.
Electricity generation grew at a low 2.16% over the previous year in July, according to provisional estimates by CEA.
Auto sales increased in July, bucking the negative trend, as the numbers are for dispatches to retailers, the data shows that vehicles are moving to the show rooms in anticipation of the festive season.
Non-food bank credit increased by 18.6 % in June compared to 19.6% last year.
The 4th Advance Estimates for agriculture for 2011-12 set food grain output up by 5.2% over the previous year, though growth is uneven – pulses production is down by 5.6% while cereals is up by 6.0%, even within cereals, coarse cereal output has fallen by 3.8% while it is rice and wheat that have registered gains.
Read:It's a drought
Read:2012-13 Annus horriblis?
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Provisional WPI inflation for June was estimated at 7.25%, with manufacturing products inflation up by 5.0%. Inflation for primary products and fuel registered in double digits at 10.5% and 10.3% respectively.
Consumer price inflation for CPI IW was estimated at 10.05% while for CPI AL, though this was lower at 8.03%, inflation in this group continued its uptrend since the January trough.
The international crude oil price for Indian Basket increased in both dollar and rupee terms over July: $103.87 per barrel on 30th July (Rs 5758.55 per bbl) compared to $ 91.95 /barrel on 28th June (Rs 5233.79 per bbl).
Read: RBI says India inflation risks significant even as growth slows
Interest Rates
In the July review, the RBI kept all key rates constant, while reducing SLR by one percentage point.
The yields on the 10 year gilt had been falling through July however, by the end, they strengthened again as the RBI's hawkish stance became quite clear.
With Korea going in for a surprise rate cut in July, the first since 2009, another cut is expected in August as growth is at the forefront of monetary policy concerns.
Read: Policy paralysis hardly a cliché now
Read: Dos and donts for ECB
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Exchange Rates
Exports during June were valued at $ 25067.20 million, 5.45 % lower in $ terms (18.11 % higher in Rs. terms) than last year while imports were valued at $ 35370.57 million down by 13.46 % in $ terms (growth of 8.11 % in Rs. terms) over last year.
Oil imports during June were estimated at $ 12688.6 million, 4.43 % lower than last year while non-oil imports at $ 22681.9 million were 17.80 % lower than last year.
The trade deficit for the period April-June was estimated at $ 40055.45 million, lower than the deficit of $ 46233.94 million during the same period last year.
The rupee ranged between 54.55 and 56.38 over the month of July, with downward pressures playing out more sharply.
Read: I'll do anything
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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.

This month we highlight the situation in cereals and pulses. While the 4th Advance Estimates for 2011-12 have set output in food grains up by 5.2% over the previous year, with rice and wheat production growing by more than 8% each, the price situation is still not comfortable. One of the reasons for the higher prices is of course the higher Minimum Support Prices (MSP) for both crops, part of the government farm policy. Since 2006-07, the government has been pushing the MSP for crops higher, to compensate for the higher costs of production. Unfortunately, little is being done to raise agricultural productivity and reduce the burden on the costs side. This year, the MSP of rice and wheat for 2012-13 has been set at Rs 1,250 and Rs 1,350 per quintal, respectively, indicating an increase of 15.7 % for rice and 5.1% for wheat. Add to this the fact that rains are significantly lower this year and the outlook for production is already causing inflationary pressures ahead. In fact, within the cereals and pulses group, it is only rice, wheat and urad that have registered growth in output last year. For all other crops in the coarse cereals and pulses categories, production had already dipped over the previous year putting the stress on prices. Given the government's poor track record on intervening in the market with its excess food stocks, it is unlikely that this year would see anything different.

The Indicus Price Monitor currently tracks real time prices for 63 commodities that make up 22% 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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