April 2012

2nd April 2012,
Indian Economy Next Quarter
Food items especially vegetables to show steep price pressures with deficient rain
Fuel prices need to adjust to rising crude prices ? no appreciable softening in inflation this year
High government borrowings keeps pressure on RBI - yields tighten
With global turbulence, expect rupee volatility to continue as RBI intervenes only as the last resort
India : Kal, aaj aur kal

As expected the Budget was a damp squib, the deficit that had shot up was brought down a little. The stance of the government is quite clear - all the talk about intent to reining in fuel subsidies is negated by just one sentence in the Fiscal Policy Strategy Statement ?With respect to rationalization of petroleum subsidy, government has already decontrolled the pricing of petrol.? The fact that the petrol prices have not changed in Delhi since November, even as the crude basket price rises speaks for itself. To take another example, for all the talk about encouraging foreign investment, the turnaround in tax laws has stunned the markets.

To make matters worse, the debate which should have focused on where our economy was headed was overtaken by drama caused by coalition politics. Not only are we deprived of any serious talk, credibility is so low that any positive reassurances for the future are now looked at sceptically. There has been enough said, both within the government and from analysts about the structural problems plaguing our economy. As we have said for long now, the problems and their solutions are well known. Yet, now we have an added issue - recognition of the structural deficit in the mindset of our policy makers and in governance - we are therefore stuck in a rut. Gone are the years when we spoke of achieving a double digit growth path, we are now back to getting the basics in place - bijli, sadak, paani.

And still there is a lot of hope around that things will take a turn for the better sometime soon. The MSME Business Confidence Survey conducted by Indicus Analytics showed an overall brighter picture this quarter than it did last year at the same time. Official data will reflect better numbers than Q3the past quarter, the IIP with all its volatility is trending up now ? while the January number surprised all forecasters by turning in growth close to 7%, in February too core sector output rose by 6.8%. Keep in mind though that this does not imply any dramatic upsurge in industrial activity. In fact, tFor all the twists and turns in the ?statistically bewildering? IIP, we can still say that there is a high probability that IIP growth will now move up into double digits by October. The HSBC Markit Manufacturing PMI moved down marginally in March. butAt the same time t his drop was offset by the fact that the order book index is still expanding. This is also collaborated with anecdotal evidence from firms. Any case, going forward the interest rate regime will favour a more positive environmentthis turnaround, as the RBI will take small calibrated steps downwards from this month?s policy review.

The reason why the steps in the rate cut cycle will be small and calibrated is that inflation hasn?t been conquered yet. In fact consumer price inflation just edged up in February, reversing a decline over the last four months. Fuel price adjustments remain a ticking bomb and going ahead, as mentioned earlier, the high fiscal deficit and the low rupee will continue to feed pressures. Meanwhile under-recoveries register sharp rises ? according to the Ministry of Petroleum and Natural Gas?s latest figures, the under-recovery on domestic LPG increased from Rs. 439.5 in March to Rs. 570.5 effective 1st April.

Interestingly if you want to see a brighter picture for sales, look into the countryside. Auto manufacturers are making a beeline for the Tier 2/3 cities and tapping into the villages for higher sales. Electronics firms are also heading out now discovering new territories. Whether it is the effect of MGNREGA or higher land prices, it is now confirmed that rural consumers are less dependent on agriculture and have more disposable income. These consumers do not depend on bank credit and are more comfortable with the cash economy, and there is a lot of cash going around. With urban Indians reeling under high food prices, higher rents and transport expenses, higher education expenses, the rural story may look happier at the moment. The problem is that a system that runs on transfers is bound to lose steam and unless the economy is put on a higher productivity path, inflationary pressures will persist. And that is where we are stuck.

Sumita Kale and Laveesh Bhandari

2nd April 2012, 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
IIP grew in January by 6.8% over the previous year, mining, manufacturing and electricity grew by (-) 2.7%, 8.5% and 3.2% respectively.
The eight core industries grew by 6.8% in February, with coal registering growth at 17.8% and cement at 10.8%, the two star performers in the month.
Electricity production in March grew by just 2.07% over the previous year according to provisional estimates by CEA.
HSBC Markit Manufacturing PMI fell to 54.7 in March from 56.6 in February, new orders continued to expand though at a slow pace. The service sector index also declined to 52.3 from 56.5 the previous month.
7.44 million wireless subscribers were added in February, out of these 4.43 million were in rural areas making for vibrant growth in the rural network.
Read:Volatility is inherent in the nature of IIP:TCA Anant
Read:Eurozone in recession, India slows
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The provisional WPI set inflation at 6.95% in February, a tad higher than the previous month. Manufacturing products inflation stood at 5.75%, compared to 6.49% in January.
Consumer price indices showed rise in inflation in February as fruit and vegetables rose steeply. Inflation for CPI IW was estimated at 7.57% and for CPI AL it was 6.34%.
Crude oil continued its rise since December, the price of the Indian crude basket stood at $123.61 in March compared to $117.67 the previous month.
The FAO Food Index stood at the same level in March as the previous month, though oilseeds showed a sharp rise.
Read: Government initiates exercise to revise WPI series
Interest Rates
With the 75bps reduction in CRR in March to ease liquidity, the RBI has set the stage for a mild cut of 25bps in the repo rate in its April policy. With inflation showing no sharp decline yet, the rate trajectory will not be steep.
High government borrowings announced in the budget spurred bond yields up and the yield on the 10 year gilt benchmark moved to 8.59% from the 8.3% levels at the middle of the month.
Across the globe domestic factors play out differently ? Australia is looking for a rate cut in May as growth has dimmed while in China the inflation persistence curtails the possibility of a rate cut. While the Bank of England has kept its rates at a record low, concerns of a housing bubble rising are now gaining weight.
Read: Mukherjee crowds out issuers with Indian government glut
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Exchange Rates
Exports during February were valued at $ 24618.08 million, 4.28 % higher in $ terms (12.84 % higher in Rs terms) than last year while imports were valued at $ 39781.68 million, 20.65 % up in $ terms (30.56 % in Rs terms) over last year.
Oil imports during February were valued at $ 12659.9 million, up by 39.45 %, while non-oil imports were up by 13.5% estimated at $ 27121.7 million.
The trade deficit for April-February 2011-12 was estimated at $ 166749.92 million, compared to the deficit of $ 115261.03 million during the same period last year.
The rupee lost value in March inching back past the 50 to a dollar mark. With more worries coming in from the Eurozone, the rupee may continue to falter. This year the value of the rupee is expected to be volatile as uncertainty in the developed world will make its impact.
Read: Rupee slides to 2 month low ? RBI to save intervention action for 52-53 level
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Indicus Price Monitor

Tracking inflation in real time

As introduced in our newsletter in January, Indicus has been monitoring primary food prices on a real time basis. While the inflation estimates may differ from the WPI of corresponding items due to different methodology, the broad trends remain the same. The trends in oilseeds and fruits and vegetables highlighted earlier manifested themselves in the WPI soon after. In February, we had showed that the positive impact of the high base effect caused by last year?s vegetable prices was rapidly eroding and had stated then that, ?the drop in the prices for vegetables (notably potatoes and onions) has now stabilised and inflation is set to reverse into positive territory in coming weeks?. This trend shows up clearly by March, with added pressures coming in from the heat and deficient rainfall.

Usually the prices of vegetables begin to rise in summer, this year the rise is even steeper since a cold wave damaged crops in February and currently almost all regions are running on scanty rainfall ? rain in March was 64% less than the long period average across India. Meanwhile, the jump in the price of potato has most cause for alarm as this is the most widely consumed vegetable, one that has traditionally been added to make for more filling meals. The spikes in the prices set off alarm bells in the markets and commodity bourse regulator FMC has now restricted transactions in seven farm commodities by hiking the margin amounts. Whether it is beans, cabbage or tomatoes, all vegetables are now showing high uptrend in prices, putting pressure on the wholesale price index in the coming month.

The Indicus Price Monitor currently tracks real time prices for 70 commodities that make up 22% share of the WPI. The coverage of items is being expanded to provide a comprehensive indicator for price information in India.

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