December 2008

   9th December 2008
  Indian Economy Next Quarter
Government announces measures to support large business.
Spoilt brats ask for more.
Official data finally shows growth slowdown – expect 5.5-7.5% this year.
Inflation collapses with energy and commodity prices, food articles still high.
Good rabi crop expected this year - farm and rural incomes to rise.
Govt. expenditure to rise substantially; may help growth but raise inflation.
  India : Kal, aaj aur kal
Slowdown continues, but economy appears to be getting out of the depths of pessimism it had gotten into in the last few weeks. Though international conditions remain quite bleak, India has managed to hold its own in the last few weeks, and has not collapsed like many predicted. The worst is of course not over yet, but there our economy has shown a lot of spine.

The same cannot be said of much of the organized large business, which wants greater and greater handouts. Let’s put things in perspective here. A number of companies and business groups had over-extended themselves, in the belief that low interest rate – easy access to funds combination would continue for a while. When this did not materialize on account of international forces and RBI action, they got into trouble. Since the economy, to some extent does depend upon the performance of the corporate sector, the government can not be faulted for some of the corrective measures. But the fact remains, recent government actions are meant to support the corporate sector, and the corporate sector wants the people of India to pay much more for its sins.

It has been argued that the interest rate regime created by the RBI was too high, and the controls put in place by the Finance ministry were impacting the corporate sector and economy adversely in the era of international recession. These obviously needed to be relaxed. As long as the government sticks to doing that, it is fine. But we need to guard against measures that provide additional support. Net net, it is important to limit real-estate and wage bubbles for sustained and equitable long term growth.

There is too much uncertainty this year to give a point estimate for growth, but most people aren’t satisfied with our estimated range of 5.5-7.5%. Actually, it is time that people planned for differing scenarios…things could get worse, they could also get better. The fall in crude was unprecedented and the flip side has been global recession and the accompanying dollar rise.

Meanwhile, there are many positives and the overwhelming gloom and doom stories being painted are one sided. Agri is of course the star, with record harvest being now predicted - despite what the government data said a couple of months back. Also with higher minimum support prices, farm incomes will give that much-needed support for aggregate demand. Telecom is still going strong, if a rural push is maintained; this will have valuable spin-offs in raising demand. While luxurious penthouses are thankfully out, the low cost 1 BHK is back in fashion again, as builders are pushed to satisfy the markets with lower margins. Healthcare continues to grow rapidly, Education – among the largest sectors – is changing in structure and scale rapidly, and the electorate is rewarding politicians who serve the masses.

All in all despite terror, politicians, corporate lobbying, international pressures, India moves along, thank you very much.

Sumita Kale & Laveesh Bhandari
9th December 2008 Indicus Analytics
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   Economic Growth
GDP for July-September 2008 at 7.6%, slows down from 7.9% of Q1. 
Manufacturing shows steepest fall to 5.0% growth from 9.2% last year. The sector that grew the fastest was trade, hotels, restaurants with 10.8% growth, compared to 11.0% last year.
The decline in growth of electricity (3.6%) and mining (3.9%) remain as long term causes of concern.
IIP for September grew at 4.8%, compared to 6.98% last year.
Manufacturing slowdown showed up sharply in the ABN-AMRO PMI survey which revealed a contraction in the index in November. New orders and export indices slumped reflecting the sudden downturn in demand worldwide.
Electricity generation slowed to a growth of 2.57% in November, provisional data from CEA showed.
Agriculture rabi sowing is well under way and reported acreage sown till 21st November showed significant 14.1% rise in all crops, except a decline in wheat, due to excess soil moisture in UP, Punjab and Bihar. Outlook is good for the season.
10.3 million subscribers added on the telecom network in October alone, showing that this is one sector that has been bucking the trend so far.
Railway freight revenue has risen by 16.3% in the period April-October, with the Net Tonne Kilometres going up by 8.26%, compared to 11.05% and 5.34% rise last year respectively.
Read: The West in recession
Read: The global crisis and India’s growth rate
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Consumer prices for October showed continued rising trend with CPI AL at 11.14% and CPI IW at 10.45% inflation.
While WPI fell to around 9% in November, primary articles and food articles inflation continued to be high at 11.98% and 10.43% respectively for the week ending November 22nd.
 PMI survey showed decline in the input and output price indices in November as crude and commodity prices fell globally.
Crude oil has fallen below $50 a barrel as global demand has fallen and the dollar strengthened.
With fall in crude, the 7% inflation target of RBI seems very feasible, if trend continues, inflation can come down further into the 5-6% range.
Expecting a new series of WPI from January that will change all these calculations.
Read: The Oil and Gas Industry: Stable or Volatile
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  Interest Rates
Rate cuts by the RBI in have brought the CRR down to 5.5%, repo down to 6.5% and reverse repo cut to 5%.
As inflation eases around the world and growth becomes a worry, banks cut rates, raising expectations of more rate cuts in India.
The ECB, Bank of England are expected to make the most aggressive rate cuts ever but there is a growing feeling that this is not quite the solution to the problem, even if markets seem to be demanding it.
In the US, while the fed rate is down to 1%, there has hardly been any change in mortgage rates for the sector most hit, leaving households bereft of any help.
 In India, the market now expects more cuts and the RBI is all set to oblige.
Read: Monetise public debts and deficits (especially the comments section of this post)
Read: A race to the bottom
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  Exchange Rates
Exports fell for the first time in October by 12.1% over last year in dollar terms, imports rose by 10.6%.
While oil imports were up by 22% in October, non-oil imports rose by just 5.5%.
The trade deficit for the period April-October was $72.99 billion, compared to $45.64 billion last year.
The rupee has been plummeting since August, and has now crossed the 50 to a dollar mark – an all time low.
RBI has intervened to reduce intra-day volatility but the level is beyond all help.
  The dollar has been growing in strength worldwide, even though the fundamentals of the US economy do not warrant this trend long term.
Read: Forex reserves: Sinking feeling
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