December 2007

   6 December 2007
Indian Economy Next Quarter
Moderation in growth shows up in numbers, we expect further moderation.
India grows at 8.9% (July-Sep 07-08)- we maintain estimate of year growth at 8.4%.
Global scenario ahead bleak with expectations of recession in the US gathering steam.
Whiff of international stagflation in the air.
Crude oil prices continue to rise, seriously denting investment.
Expect widening of tax net next year as subsidies pile up.
FAO gives alert on grain prices for the year ahead- keep an eye on your food bill.
India : Kal, aaj aur kal
When everything is going so good ? exports increasing despite high rupee, growth marginally slower at 8.9% in the second quarter this year, stock market still in its 19000 highs, tax receipts bounding up like never before, why do we feel that twinge of worry? Ok, maybe it?s because we are trained in that dismal science, we find our niggling fears come from basic household budgeting that is getting out of hand. The government has asked permission to spend more this year, but says it will still keep to the deficit target. This is following last year?s pattern where higher tax revenues compensated for higher expenditure. So as long as they have the money to pay, what is the problem? The problem is that the extra expenditure is mostly on subsidies...subsidies on fertilizers and food and since the last two years on oil bonds to compensate companies for not passing on the high fuel prices to the ?aam aadmi?.

Two years back, Rs. 11,500 crores were issued as oil bonds, last year it was Rs. 24,121 crores. The government will issue oil bonds worth Rs. 23,457 this year, this will actually take care of just 43% of the total under-recoveries of the oil marketing companies, estimated at Rs. 54,935 crores for 2007-08. The burden of the remaining 57% is to be borne through discounts by upstream refineries or in the form of losses for the companies themselves. This of course affects the investment plans of the companies, in fact Moody?s has just downgraded the IOC credit rating to negative from stable.

Just a few numbers to put the crores of money in perspective: this year budgeted food subsidies are Rs 25,000 crores, fertiliser subsidy is around Rs 22,000 crores, oil bonds announced so far this year are Rs. 23,457 crores. The govt budget for school education this year is Rs. 23,000 crores. Clearly, oil bonds are costing the country in its long-term growth of human and physical capital.

And what is the government doing to set its house right? Not much from what we can see. The PM sighs over the high subsidies, and the FM worries that financial sector reforms are slow, while the election agenda concerns itself with religion. The PM and FM cannot wash their hands off this!

Sumita Kale & Laveesh Bhandari
6th December 2007 Indicus Analytics
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Economic Growth

Indicus Forecast 2007-08

GDP 8.4%
Agriculture 2.7%
Manufacturing, Mining & Electricity 8.5%
Services including Construction 10.1%

Month of forecast: October 2007

GDP numbers for the July-September quarter put India?s growth at 8.91%, slower than last quarter?s 9.3%. Manufacturing sector dipped below double digits, as anticipated in our newsletters earlier, to 8.6%.
Trade, hotels etc. at 11.4% and Construction at 11.1% were the leading sectors, while agricultural estimates show continued high pace of 3.6% growth.
Fluctuating IIP growth gives 6.41% growth in September, bringing the half-year?s industrial production growth down to 9.2% compared to 11.1% last year.
Infrastructure industries grew at 6% in September. Only electricity has grown at a faster pace (7.6%) in the first half of this year, compared to last year (6.7%). All other sectors show dampened growth.
But electricity sector growth has been moderating significantly lately, growing at 5.45% in November compared to 8.8% last year.
Exports boomed again at 35.65% growth in October, imports up by 25.27%. Growth in non-oil imports higher than oil imports, showing growth momentum is still strong.
The ABN-AMRO survey of firms shows easing in manufacturing activity in November, compared to October, which was the pre-Diwali month. /td>
NCAER survey shows business confidence index up in the July-September quarter, from the previous quarter, but level is still lower than last year. Investment climate index stood at 56.1 this year, compared to 59.2 last year.
Slowdown in railways - freight traffic grew by 8.03% in the April-October period, while earnings grew by 11.1%, compared to 9.92% and 16.3% respectively for the same period last year.
Telecom sector added 8.05 million subscribers in the wireless segment in October, compared to 6.71 million last October.
Read: The times they are a? changin
Read: India may sustain 9% growth for a third year
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Crude prices breached the 99 dollar a barrel mark briefly in November and are currently settled just below 90 dollars. Government goes in for oil bonds, rather than fuel price hike, keeping the genie in the bottle for the moment.
Food prices continue to be of concern globally, the FAO news update cites supply constraints and financial market linkages as causes of high levels and volatility.
Consumer price indices ease in September: CPI UNME down to 5.48%, CPI AL at 6.99% and CPI IW at 5.5%.
WPI inflation has started inching up, as anticipated, at 3.21% in week ending November 17th. Provisional data has been revised upwards every time since March this year adding, on an average, 21 percentage points to inflation numbers.
Expect WPI inflation data to cross the 4.5% mark by January.
Read: High prices and volatility in food products
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Interest Rates
10-year benchmark gilt yield has risen to 7.91% range by the end of November on tight cash position as CRR hike comes into effect.
Fed expected to make another rate cut as the damage in financial markets through bad loans is more severe than thought.
While markets ask for rate cuts even in Europe, ECB has remained immune so far, citing inflationary pressures from crude and food prices. But euro appreciation and credit crunch could lead to rate cuts here as well.
10 year benchmark gilt ranged between 7.85 and 7.94 in November. Expected to stay in a range between 7.8 and 8.1 in the next two months.
Read: Mrs.Moskowitz has some input for Mr. Bernanke
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Exchange Rates
As expected, the rupee stayed in the 39-40 range to the dollar, pushing closer to 40 by the month end.
FIIs have been net sellers totalling $ 1450 million in November, since the PN rules have come into force.
Forex reserves have risen to $ 272 billion as on November 23rd, a 57% increase over last year.
Trade deficit for October stood at $ 7.4 billion compared to 6.9 billion last October.
Going ahead, the rupee will take its cue from rate moves abroad and capital inflows. Expected to continue to stay in the 39-40 range for the next month.
Read: Never say never again
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