December 2010

4th December 2010
Indian Economy Next Quarter
Growth better than expected in Q2, expect lower numbers ahead
2010-11 growth estimated around 8.6%, to rise to 9% next year
IIP set to be hit by base effect and slower growth this year.
Inflation continues to trend down at slow pace, consumer inflation around 8-9% levels next year
India : Kal, aaj aur kal

The lights continue to shine in the country as the government has released an even brighter picture of the economy than expected by us. All along this year we have maintained that despite the falling trend and volatility in the IIP, growth will be around 8.6% this year and rise to 9% next year. With the release of the Q2 numbers and revised numbers of the past two years, we now expect that this trend may materialise sooner. The signals are strong. They are from many different sources. And they are across a large set of sectors and sub-sectors.

However one of the main indicators to keep an eye on is inflation, all indices show a decline from peaks seen earlier. In the coming months, the decline is not going to be rapid as pricing pressures continue to persist from multiple sources. As we know, with a bumper harvest, higher MSPs, higher minimum wages etc. purchasing power has been given a boost helping to meet consumption aspirations across the country. Especially in the food segment, from oil seeds to milk, supply is outstripped by the demand.

The agriculture sector will show a massive rise in output and growth this year. On the one hand this will dampen inflationary tendencies and on the other will boost rural demand. As for the industrial sector, the six core industries that were on the back foot for the past six months finally showed a growth upsurge in October, with cement and steel production leading the pack. This points to strong demand coming in from the construction sector, and despite the shocks to the system from higher loan rates, scams being unearthed in realty and so on, this is one sector where again demand is far ahead of supply and real estate and infrastructure projects will push growth up in the quarter ahead.

At the same time manufacturing activity in other sectors is also picking up despite higher cost of credit, due to a good festival season and expectations of surge in rural and small town demand. This is also reflected in the HSBC-Markit PMI index which reflects the uptick in November in manufacturing activity, with the fastest expansion in new orders coming in not only from domestic but also international demand. Over and above that the backlog of outstanding orders is also finally expected to be met with rising production. We find that capacity constraints however remain and they will exert strong upward pressures on pricing in the manufacturing sector.

The service sector indicators in the CSO growth release for Q2 show a fall over Q1, however there is robust activity still expected in all segments ? railways, air freight and passengers, cargo by shipping, telecom and so on. As before, the underlying growth in purchasing power will propel growth across the board. We expect the service sector to take India into the double-digit trajectory over this decade. Manufacturing and agriculture will be constrained, unless there is sufficient reform that raises productivity in both sectors. We see little sign of change on that front, at least in the near future.

So the only fly in the ointment remains that of inflationary pressures and with the government taking on additional spending, over and above the budget, this is set to be an even more serious concern in the year ahead. With so many welfare programmes being put in place, India can well become a bigger welfare state than the Scandinavian countries, with a large population that needs to be fed and housed and whose basic health and education requirements need to be met. These are legitimate responsibilities of the government, but is the only way of meeting these responsibilities through higher inflation, or are there better solutions?

We go back to the same uncontrolled animal, inflation. It should not be taken lightly, at the current levels it is still somewhat under control, but it can get out of hand very easily. The government would do well to insure India against food and energy price movements internationally at least. That is the least it can do and it would be good to see some proactive actions on these ends.

Sumita Kale and Laveesh Bhandari

4th December 2010, 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
Quarterly GDP at constant prices for 2010-11 July-September is estimated to have grown by 8.9 % over the previous year. Mining and quarrying grew at 8.0 %, manufacturing? at 9.8 %, construction at 8.8 percent, trade, hotels, transport and communication at 12.1 %, financing, insurance, real estate and business services at 8.3 %, and ?community, social and personal services at 7.3 %. Agriculture, forestry and fishing grew at 4.4 %.
IIP for September grew by 4.4% over the previous year, with manufacturing at 4.5%, mining at 5.3% and electricity at 1.7% - the lowest growth in 16 months.
Electricity generation in October grew by 8.3% and provisional estimates put growth at 3.9% in November over the previous year.
HSBC Markit PMI showed a rise in manufacturing activity in November at the fastest pace in six months, with the index at 58.4, backed by new orders and export demand. The service sector business index also rose to a four month high of 60.1 in November.
Vehicle sales continued to record double-digit growth in November, except for Tata Motors whose Indica and Nano sales were down.
Telecom added 17.1 million subscribers in the wireless segment in September, bringing tele-density to 60.99%. However only 482 million of the 670 million wireless subscribers are estimated to be active.
Read:Roubini says India?s economic growth may surpass China?s in next 10 years
Read:India?s growth rates are 13 years behind China
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Inflation
WPI inflation for October moves marginally down to 8.58%, while consumer price indexes also show lower inflation ? 9.7% for CPI IW and 8.43% for CPI AL.
Weekly data released for the week ending 20th November showed that provisional inflation in Food articles was estimated at 8.6%, while fuel and power inflation rose by 9.9%.
Commodity prices are expected to rise in the short term in international markets ? coal, copper, crude, palm oil and others.
The FAO Food Price Index shows a steady rise in prices globally in 2010, with sugar marking the steepest climb. In November, the index stood just 18 points below its peak in June 2008. The FAO expects the food situation to be tight in the year ahead, advising consumers to brace themselves for higher prices.
Read: IMF warns India of higher inflation if growth accelerates
Read: FAO Food Outlook November 2010
Interest Rates
Yield on the 10 year benchmark gilt rose again in November, averaging 8.109% over the month, up from the previous month?s average of 8.024%.
Tight liquidity and good growth numbers have boosted the bond yields, even as the RBI relaxed the SLR norms as well as extending additional liquidity support till the end of next month.
The RBI has however ruled out a cut in the CRR as it maintains that its liquidity measures are more than adequate for the short term and managing inflationary expectations remains its prime concern.
While Thailand raised its rates citing inflationary concerns, China has also signalled a tighter policy for 2011 to ward off inflation and asset price bubbles.
Read: Disparities abound in global economic data
Read: The Eurozone slides into a vicious cycles
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Exchange Rates
Exports during October were estimated at $ 17.960 billion, 21.3 % higher in dollar terms (15.3 % higher in rupee terms) than the previous year. Imports during October were valued at $ 27.689 billion, up by 6.8 % in dollar terms (1.5 % in rupee terms) over last year.
Oil imports during October were 0.3 % higher than last year, while non-oil imports grew by 9.9 %.
The trade deficit for the period April - October 2010 was estimated at $ 72.774 billion, higher than the deficit of $ 58.311 billion during April-October 2009.
The rupee fell back into the 45-46 to a dollar range in the month of November with the strengthening of the dollar on global cues.
Read: Thoughts from Turkey and elsewhere
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