April 2010

3rd April 2010
Indian Economy Next Quarter
Inflation to continue at elevated levels another two quarters ?5% levels only by December
Manufacturers to battle input price rise
Growth expected at 8.2% for 2010-11, downside risk from monsoon and the West, as usual
Pace of rate hikes to take cues from inflation as growth will be strong
India credit rating improved with fiscal road map, positive sentiment on India high
India : Kal, aaj aur kal

Positive sentiment rules once again ? India?s credit rating raised to stable with a tighter fiscal road map, government borrowings are at lower level than last year, industrial growth is high, credit demand has improved, capex projects shelved due to the crisis are back on track, real estate hoardings have returned on city skylines, Naukri?s ads are screaming ? Jobs are back?! The Sensex has posted its fifth consecutive quarterly gain and looks set to continue its march upwards. Expectations are high from India once again, FII flowing in. We estimate this year?s growth at a brisk 8.2%, with a downside risk coming in from Westerly disturbances as before.

So what?s the problem looming on the horizon? One that has been around for a while now, and refuses to go away - inflation, not of the primary, food article variety that we have been suffering for more than a year now, but of manufacturing products. As we have been pointing out in previous newsletters, inflation shifts from one set of goods to the others but doesn?t really settle to manageable levels. Now commodity prices ? crude, iron ore, rubber, steel ? are all on their way up on global and domestic markets. Realty prices also moving up. The froth has already begun to build up again in asset prices, a worrying trend for the central bank. Rate hikes have already been factored into the markets, expect the RBI to step up the pace now.

While large firms can take these changes in their stride, the ones who need to watch out are the smaller firms and businesses, who need to have a backup Plan B with them and not get carried away by any euphoria building up. Fuel prices are going to rise, FII flows are going to strengthen the rupee, these are to be expected. Asking for sops and subsidies only protect the inefficient, which work against the long term interests of the economy, a point that we make over and over again.

For consumers, again it?s the well off who are well cushioned, the lower rungs take the brunt of inflation and unfortunately, it is left to the government to watch out for the poor. With pathetic food delivery systems, the government is doing a bad job of protecting the poor. So much of confusion that the Right to Food Bill has been sent back to be re-drafted now.

It?s not enough having the right intent, it is important to have proper implementation processes. Take for example, the Right to Education Bill, perfect in principle but again the implementation already smells of excessive control and bureaucracy ? to take just one point out of a long list of problems - for the 25% reservation for disadvantaged students in private schools, who certifies the student as disadvantaged?

Sumita Kale and Laveesh Bhandari

3rd April 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
January IIP rose at 16.7% over the previous year, Mining grew at 14.6%, manufacturing at 17.9% and electricity at 5.6% over the past year.
February data for infrastructure industries show growth at 4.5% in February, compared to 1.9% last year, with cement and steel slowing down from the previous year growth. In February 2010, electricity and coal at 7.3% and 6.8% respectively grew the highest.
In March, electricity continued to show good performance with growth at 7.75% provisionally.
Manufacturing growth slowed marginally in March from a 20-month high recorded in February, primarily due to significant acceleration in input costs. The HSBC Markit India Manufacturing Purchasing Manager?s Index stood at 57.8 in March, down from 58.5 in February.
18.76 million new subscribers were added on the telecom network in February, teledensity in the country rose to 51.05 at the end of February. Broadband subscriber base increased in February to 8.59 million from 8.03 million in January.
Revenue earning freight traffic carried by Indian Railways was 72.54 million tonnes in February, an increase of 3.6% over last year. The Net Tonne Kilo Metres (NTKM) went up from 485.302 billion during April 2008-February 2009 to 529.076 billion during April 2009- February 2010, an increase of 9.02%.
Combined domestic passenger vehicle sales of Maruti Suzuki, Hyundai, Tata Motors, Honda Siel, General Motors and Ford (which represent more than 90 per cent of all sales) rose by 19.3 per cent in March, to 1,95,805 units, compared to 1,64,104 units during the same month last year. February had higher growth at 34% as customers anticipated duty hikes in the budget. Sales expected to grow by 15% in 2010-11, despite higher interest rates and inflation, as demand is high from Tier II and III towns.
NaukriJobspeak index grew by 14% in February over the previous month, showing that hiring has returned in the economy.
Read:People, Jobs and Productivity: The ? Simple? Dynamics of Inclusive Growth
Read:Investment surges to a record high in Q4
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Inflation on the WPI rose to 9.9% in February, with the uptick visible in Manufacturing items, where inflation was up to 7.4%
Weekly data on Primary Articles show a moderation in price rise, with inflation in Food Articles down to 16.3% for the week ending 20th March, from the high of 21.1% in November.
Inflation in consumer prices has reduced marginally and is still at high levels- 14.86% CPI IW and 16.45% CPI AL.
Fuel, milk and pulses prices rose again in March, with milk crossing 18% rise, compared to 7.04% last year.
Crude oil prices have been on the uptrend, Brent crude crossed $80 a barrel in March. Oil hit a 18 month high on global exchanges on April 1st.
Domestic steel prices rose by 13% in March across all locations and products. On 1st April SAIL effected another price rise, following the rising global trend where rates have gone up due to the higher iron ore and coking coal supply contracts between steel makers and international mining firms for the current quarter.
Read: Rubber price breaks 58 year record
Interest Rates
With the RBI raising rates on March 19th by 25 basis points, the rate hike cycle has begun, as per expectations. With growth and inflation on higher than expected levels, gradual rate hikes are expected throughout the year ahead.
Government borrowings schedule has been set with 63% of the borrowings to be completed in the first half of the year, this being lower in quantum at Rs. 2.87 billion than last year and also less than anticipated by the market, resulting in lowering of yields.
Yield on the 10 year benchmark gilt that was rising in the first half of March to touch 8.0059 % on the 8th has subsequently declined to 7.7918% at the end of the month.
Major economies ? the US, UK and Europe ? are expected to hike rates earliest at the end of 2010.
Read: Lower home prices can fix what Govt. can?t
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Exchange Rates
S&P raised India?s country rating from negative to stable, with the improvement in the fiscal projections for the year.
FII investments netted inflow of $ 4.3 billion in equity and $ 2.1 billion in debt in March.
Balance of payments data released for Q3 of 2009-10 showed that exports and imports registered positive growth, after consecutive declines in the last four quarters and three quarters respectively. Private transfer receipts remained robust during Q3 of 2009-10.
Despite low trade deficit, the current account deficit was higher at US$ 12.0 billion during Q3 of 2009-10 mainly due to lower invisibles surplus.
The current account deficit during April-December 2009 was higher at US$ 30.3 billion as compared to US$ 27.5 billion during April-December 2008.
Surplus in capital account increased sharply to US$ 43.2 billion during April-December 2009 (US$ 5.8 billion during April-December 2008) mainly on account of large inflows under FDI, Portfolio investment, NRI deposits and commercial loans.
As the surplus in capital account exceeded the current account deficit, there was a net accretion to foreign exchange reserves of US$ 11.3 billion during April-December 2009 (as against a drawdown of US$ 20.4 billion during April-December 2008).
The rupee completed a second quarter of gain against the dollar, moving to 44.93 on the 31st of March on the forex market. While part of this stems of global dollar weakness, the influx of FII money into Indian stocks also plays a large part in strengthening the rupee. With positive sentiment in India, the rupee strengthening is set to continue this year.
Read: US decline, sloth look a lot like end of Rome
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