December 2011

5th December 2011
Indian Economy Next Quarter
Growth slowing but economy doing better than the current numbers indicate
Improved performance by Q4 as agriculture, services hold up
Industry set to have a slow recovery over the next two quarters
Food inflation falling, manufacturing stable and fuel inflation to rise
Inflationary pressures will keep rate cuts at bay
Pressure on rupee to continue over the next quarter, confidence revival unlikely in the short term
India : Kal, aaj aur kal

Finally an end in sight to the rate hikes - growth has been pushed down, the estimates for Q2 growth have come in at less than 7%, and for the first time in more than two years primary products inflation has fallen below double digits. Unfortunately, this does not bring us immediately back to the good times. Inflationary pressures persist, especially in minerals and fuel and the RBI continues to warn us that it will not hesitate to act to dampen expectations. The trajectory of inflation will therefore be watched very closely. While inflation in manufactured products is currently expected to touch 6% levels in the next quarter, overall WPI for the next year is still expected to average 7%, nowhere close to the 4-5% that the RBI has been comfortable with in the past. Even though the RBI has factored this in, there would be little tolerance of a movement away from the 6-7% level.

It will therefore take a few more months before a pause can actually translate into rate cuts, if the RBI sticks to what it said in the past. Support for a less tight monetary policy comes in of course from low manufacturing growth, the PMI for India has been hovering just above 50 for the last three months and the IIP growth has been heading downwards. We expect the IIP growth to reach a low averaging around 0.6% in Q3, thereafter moving up gradually into 3-4% levels by next June, a slow recovery at best.

On the other hand, there are additional complications coming in from the external front that will make it even more difficult to keep inflationary pressures down. Though the rupee has seen a steady decline in the past few months, there were hopes that the RBI would step in aggressively to stem the fall. This hasn?t happened, the RBI has stuck to its stated policy of only managing intra-day volatility. Given the inflationary impact of a falling rupee, the lack of support may seem baffling, but look at the underlying factors for the decline and the policy stance is understandable. The rupee has been hit by large capital outflows ? partly due to the dark global environment, and partly due to policy stagnation that has undermined confidence in the domestic economy. With the RBI seeing no signs of positive movement of either of these fronts, a commitment to holding up the rupee can have dire consequences on the forex reserves in the medium term. So the central bank will tread softly, taking small measures like controls on ECB, some sort of capital controls etc. but little else. Whether un-interested, unwilling or unable, or perhaps all three, we cannot expect anything more from this constellation of policymakers and central bankers.

Apart from all the rest, the fisc, which has played a key role in raising inflation, needs more attention. It is already clear that the fiscal deficit target for this year will not be met. Confidence in the economy can be boosted if there is an assurance to trimming the deficit. The question is whether the government can even think of looking in that direction, the focus on welfare expenditures clearly taking precedence, especially with seven states going to the polls elections next year.

Fortunately, on the growth front, all is not as gloomy as before. Yes, construction and mining are two sectors that will take a while to recover, but agriculture has done well, auto sales were much better than expected in November, the services sector PMI was significantly higher in November with strong expansion in new business. Seasonality factors will also give a short fillip next quarter. Yet all this is overshadowed by the loss in India?s growth potential, with investment plans on hold. The crux of the matter is that while in the short term, we can expect better growth over the last two quarters of this year; inflation and policy stagnation have already taken a toll on the long term.

Sumita Kale and Laveesh Bhandari

5th December 2011, 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
The economy grew by 6.9% in 2011-12 Q2 over the previous year. The three worst performing sectors were - mining which fell by 2.9%, manufacturing which grew by 2.7% and agriculture that grew by 3.2%. The three best performing sectors were Finance, insurance, real estate and business services that grew by 10.5%, trade, hotels, transport, storage and communication that grew by 9.9% and electricity that grew by 9.8%.
September IIP posted a growth of 1.9% over last year, with mining down by 5.7%, electricity growing at 9% and manufacturing by 2.1%
The eight core industries grew by just 0.1% in October over the previous year, except for steel and electricity, all other sectors registered negative growth.
Provisional estimates of electricity generation for November show growth by 14.07% over the previous year.
Manufacturing PMI fell marginally down to 51 in November, with delays caused by power cuts and weak rise in new business orders.
Services sector PMI rose to 53.2 in November from the contracted index level of 49.1 in October, with boost in new business orders.
Vehicle sales in November registered a comeback from the slack earlier, except for Maruti Suzuki, all other companies saw double digit growth in sales from last year. Two wheeler sales continued to be strong, with high growth exceeding 20% on last year.
Non-food bank credit increased by 18.2 % in October compared with 20.8 % last year, agriculture loans increased by 7.1 % down from 20.4 %, industry increased by 23.1 % compared with 24.8 % in the previous year, while credit to the services sector increased by 18.2 %, lower than 21.5 % in the previous year.
Read:Growth paradox
Read:Q and A: Sushil Kumar Shinde Union Power Minister
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Provisional estimate for WPI in October showed inflation at 9.73%, with manufacturing products inflation at 7.66%.
Weekly inflation estimates for primary products fell below double digits yoy in November, the first time in 25 months.
CPI IW registered inflation of 9.39% in October, while CPI AL registered inflation at 9.36%, both marginally lower than the previous month.
According to HSBC Markit PMI, input prices index accelerated at 63.1 against 62 in October and output prices index stood at 55.4 against 55.3 in October, the readings continue to exceed historical averages. Price pressures therefore are still very strong.
Read: Amid poor demand, rising input costs catapult cement prices to an all time high
Read: Central banks liquidity move sparks commodity rally
Interest Rates
The 10 year gilt benchmark yield moved up from an average of 8.509 in October to 8.935% in November. While the yield crossed 9% in mid-November, it has since come down to around 8.7% level by the end of the month, with support for government bonds from the RBI OMO.
The RBI has indicated a guidance towards a pause in the December policy review, and with the current trends in growth and inflation support this.
Global conditions are pushing central banks around the world to cut rates and infuse liquidity.
Read: ECB Stark Text: Monetary policy shouldn?t be overburdened.
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Exchange Rates
India?s exports during October were valued at $ 19869.97 million, 10.82 % higher in $ terms (22.92 % higher in Rs. terms) than last year. Imports during October were valued at $ 39513.73 million, a growth of 21.72 % in $ terms (35.01 % in Rs. terms) over last year.
Oil imports during October were valued at $ 10076.48 million, 20.73 % higher than last year while non-oil imports estimated at $ 29437.25 million were 22.07 % higher than last year.
The trade deficit for April-October-12 was estimated at $ 93690.54 million which was higher than the deficit of $ 85651.29 million during the same period last year.
The rupee depreciated over November crossing the level of 52 to a dollar by the third week.
Read: An assessment of recent macroeconomic developments
Read: So what?s happening to the Rupee?
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