August 2013

5th August 2013,
Indian Economy Next Quarter
Growth gloom worsens with no turnaround in sight.
Inflation trickier with the fall in the rupee- expected to rise post-monsoon.
Primary food items inflation show no signs of relenting, pressure on households grows.
Key rates not set to move down as central bank grapples with conflicting objectives.
India : Kal, aaj aur kal

The growth gloom gets deeper as the IIP refuses to come out of the red and the HSBC Markit PMI shows contraction in service index, even as the manufacturing index is stagnant in July. The core sector estimates for June have been bleak, and vehicle sales are down through July. Credit growth has been considerably lower than last year and the expectation for lower rates, that could have given some signal to stimulate growth, is clearly not going to materialise this year. The central bank is holding out on rate cuts, and the reason is obvious - on the external front, the situation has been critical for long and the rupee is facing immense pressures, this slide has of course been overdue. While this seems to be obvious, the government is flapping around looking for some kind of solutions, changing FDI norms for instance. But can these really make a difference when the core is rotten and the time for quick fixes are long gone? So what will make a difference?

Look at the inflation scenario to get another perspective of the same problem. Prices of basics like rice, wheat, potatoes and onions are not on their way down, though a good monsoon can mean lower pressures for some items like oilseeds, pulses. On the other hand, underlying all price pressures is the fall of the rupee hitting the crude oil bill hard and fuel hikes are inevitable. For companies, the input costs are also rising with the rupee depreciation. So even as the WPI manufacturing products inflation has fallen below 3%, for the firms the future does not look very bright. All this is of course happening because the structural problems that afflict our economy are not being addressed.

To take care of the rupee fall, the government has moved to relax FDI norms to attract investment, unfortunately this does not help solve our core issues of land acquisition, power shortages, poor roads etc. In fact, we are now in a rut because there has been no long term vision. Most importantly we are suffering from a massive trust deficit and any superficial moves will not push the economy back on track. There are more than a hundred bills pending to be cleared and getting key bills passed this monsoon session can in fact be the single biggest boost to the economy. Potential investors within and outside the country need to be convinced that the government is working towards a road map to clear hurdles, they need to see clear positive action with a view to some committment in the long term.

We can go on talking about how 6% growth is such a wonderful number ‘in the circumstances’, and yet know deep inside that the costs of such low growth are mounting on the electorate. Pushing India out of the low growth-high inflation trough needs some strong moves. Everyone knows that depending on the central bank every time to pull India out of a mess can only go so far, in the end if we are to see a year ahead that is different from the last two, this government needs to get its legislative act together.

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

5th August 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 growth in May dropped by 1.6%, manufacturing declined by 2.0%, mining fell by 5.07% and electricity grew by 6.2% over the previous year.
Production in the eight core industries grew by 0.1% in June over the previous year; fertilizers, refinery products, steel and cement showed positive growth, while the other sectors showed decline in output compared to the previous year.
The HSBC Markit Manufacturing PMI stagnated at 50.1 in July, compared to 50.3 in June. The Services PMI contracted for the first time in four years at 47.9 with transport and storage and renting and business activities leading the fall.
Electricity generation in July was 4.68% higher than the previous year according to provisional estimates by the CEA, while their actual estimates for June showed output up by 0.03%.
Non-food bank credit increased by 13.4 % in June, compared to an increase of 18.2% last June, credit to agriculture increased by 9.9 % as against 15.5 %, credit to industry increased by 14.1 % compared to 20.7 %, credit to the services sector increased by 12.1 % compared to 18.6 %.
The 4th Advance Estimates for agriculture for 2012-13 showed the total food grain production down by 1.5% compared to the previous year. Though oilseeds production was up by 4.1% cotton and sugarcane production declined compared to the previous year.
Read:Tail wagging the dog
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Provisional inflation in WPI was estimated at 4.9% in June, marginally higher than the previous month.
Manufacturing products inflation was estimated at 2.75% and Fuel and power at 7.12% inflation in June. Primary items inflation at 8.14% was higher than the previous month.
Consumer inflation was estimated at 11.1% for CPI IW and 12.8% for CPI AL in June, both higher than the previous month.
Crude oil ended July at $105.61per barrel (Rs. 6318.65) compared to $ 100.50 (Rs. 6089.3) per barrel at the end of June.
Read: Rural inflation adds to UPA’s election woes
Read: For India's Inflation Crisis, See Onion Prices
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Interest Rates
The yield on the 10 year benchmark gilt averaged 7.8249% in July, higher than the 7.333% average in June.
The RBI left all key rates unchanged in its July policy review once again, the external situation being of utmost priority at this critical juncture.
Read: It's status quo on repo, CRR; focus shifts to rupee
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Exchange Rates
Exports during January were valued at $ 25587.24 million, 0.82 % higher in $ terms (6.67 % higher in Rs. terms) than last year, while imports were valued at $ 45583.25 million (Rs.247593.63 crore), up 6.12 % in $ terms and 12.28 % in Rs. terms over last year
Oil imports during June were valued at $ 12767.7 million, 13.74 % higher than last year while non-oil imports estimated at $ 23267.0 million were 6.71 % lower than last year.
The trade deficit for April-June was estimated at $ 50180.06 million which was higher than the deficit of US $ 42216.73 million during the same period last year.
The rupee averaged 59.8924 to the dollar in July, compared to 58.397 in June, however the level of 60 was breached often during the month.
Read: Wanted: United show by RBI, government on rupee
Read: Circular reasoning
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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.

The 4th Advance Estimates for agriculture put India’s groundnut output at 47.49 million tonnes in 2012-13, the lowest since 2002-03. The deficient monsoon last year and a 37% rise in minimum support price had led to prices rising steeply upward from August. With new regulations from APEDA that led to restrictions on exporters, prices fell from January this year. As Indian groundnut was not globally competitive, weaker demand led to further downward pressure on prices. Groundnut is mainly a kharif crop, and with good rains so far, Gujarat which accounts for almost a third of India’s ground nut crop has seen 100% sowing after a gap of two years. This year therefore the crop should recover to its previous high levels of output. Meanwhile, the MSP for 2013-14 has been set at Rs. 4000 per quintal, 8% higher than last year. The all India average whole sale price of packed ground nut oil that had been rising since 2009 peaked at Rs. 12609.56 per quintal in February, and declined to average Rs. 12114.44 per quintal in July. The trend seems set for lower prices this year.

Indicus Price Monitor

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