Emerging Economy - Indicus Analytics - A compilation

Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx

The
Emerging
Economy
– Monthly Newsletter from Indicus
Analytics

A compilation
of the last 16 Issues
up to January 2010

1


The
Emerging
Economy
Analytics
5th January 2010

Highlights
• Future growth on much firmer footing – across
manufacturing, services and agriculture sectors
• But corporate hiring and investment to stay flat
for another quarter
• Tax collections - Boost in advance tax but
indirect tax collections much lower than
expected
• Good rabi output expected, of course, if weather
holds up
• Inflation concerns will reflect in small increase
in CRR and rate hikes by RBI this month

2


With the worst of the economic crisis behind us, we look
ahead to forecast trends for the decade ahead – growth is
set to be much faster than the last ten years. The driving
force of the decade? Transport, storage and
communications - a large road network is going to be
operational, ports are rapidly improving, air transport
infrastructure is being overhauled, and most important, a
strong ecosystem has been created for the telecom
sector.

The mainstay of the Indian economy for so many decades,
agriculture could well grow faster than the expected 3.4%
- a rural road network has been built up, high agri
commodity prices would improve terms of trade towards
this sector, rural human capital has improved
tremendously in the 2000s, new technologies are about to
enter on a mass scale, agri reforms such as the APMC acts
are being overhauled. Though it is difficult, to time the
tipping point, in Indian agriculture – we would expect it to
be somewhere after the middle of the decade though we
may need to wait till the 2020s for the full impact of these
changes to be felt.

Rapidly growing domestic and international markets will
keep manufacturing opportunities buoyant, but there
would be spoilers in the shape of energy, wage price
inflation, the unresolved labour and land issues.

Bottom-line? Overall GDP growth will be around 9.6%
annually, even if the government does not do anything
radically different. It would be higher if agriculture and
electricity, gas and water supply are able to break through
their long term institutional constraints. It would be lower
if inflation eats into macro-economic stability and law and
order conditions get out of hand.

3


This does translate into greater per capita income and
changed households budgets. Here again, transport,
education, health and recreation would all be among the
most rapidly growing items of consumer expenditures.
The tipping point is not so much in health or education in
the aggregate, but in goods and services that promise
better lifestyles.

Despite such a rosy scenario, India will not rid itself of
poverty - almost 200 million persons are likely to remain
extremely poor by the end of the decade. Social safety
nets would continue to be critical – the impact of these on
the fisc can be minimised if governance and institutional
change remove inefficiencies in distribution.

Indians remain one of the most optimistic people on the
globe, growth prospects are bright even as numerous
issues need to be resolved. But the true test of success
would be when the energy in entrepreneurs and
consumers brings us a greener, more equitable decade.

P.S A more detailed explanation of these forecasts and
trends, with graphs was published in the Indian Express,
available now on our website.

Sumita Kale and Laveesh Bhandari

5th January 2010, Indicus Analytics

Sumita Kale is Chief Economist, and Laveesh Bhandari is
Director, Indicus Analytics. They can be contacted at
sumita@indicus.net and laveesh@indicus.net.

4


Economic Growth

• HSBC Markit Purchasing Managers Index rose
again for the first time in 3 months to 55.6 in
December. New orders index at 60.1 was at its
highest this year.
• IIP rose by 10.3% in October over last year’s low
growth of 0.1%, with manufacturing reviving at
11.1%, mining at 8.2% and electricity at 4.7%.
• Electricity generation in November stood 3.27%
higher than last year. In December, provisional
output estimates put growth at 6.2%.
• Cement production increased by 12.7% in
November over last year, with sales rising by
11.3%.
• Steel production (total finished steel, alloy + non-
alloy) was at 38.961 million tonnes during April-
November, 2009, a growth of 2.5% over the
previous year. Consumption of total finished steel
(alloy + non-alloy) was at 34.304 million tonnes
during April-November, 2009, a growth of 6.8%.
• Telecom added 17.65 million new subscribers in
November bringing tele-density to 46.32, highest
growth is in Circle B. Total broadband subscribers
reached 7.57 million.
• Rail freight traffic increased by 9.22% in
November, revenue earnings from commodity-
wise freight traffic rose by 10.08% during the
period April-November over the same period last
year.
• Hiring in November grew at 8.4% over the
previous month, with auto, telecom and insurance
showing strongest growth. Of the top 7 cities, 6
saw an uptrend in hiring, according to Naukri
Jobspeak index.
• Vehicle sales continued to rise in December –
Maruti became the first car in India to cross the 1

5


lakh sales mark , 1,00,874 units, Tata Motors
recorded 100% growth in the month over last
year, Hero Honda sales rose by 74%, TVS Motor
by 34.06%, Bajaj Auto by 77 %.
• Rabi crop sowing stood at 85% of normal sown
area, 1.8% up from last year – Prominent crops
with increase in sowing this year so far include
wheat (2.3%), rice(46.2%), gram and lentil (11.4
and 11.6% respectively) while those which are still
below last year’s sowing mark include peas( -
10.6%), jowar( -9.2%), urad (-5.1%), oilseeds
(-3.7%).
• Advance tax collections rise 20% in the April-
December period, compared to last year as
companies cut costs and met buoyant demand.
Automobiles, consumer goods and metal firms led
the rise. Direct tax collection, which includes
corporate and personal taxes, rose by 8.1% to
touch Rs. 2.27 billion in the period till December.

Read

Renovating our image
http://www.telegraphindia.com/1091229/jsp/opinion/st
ory_11919270.jsp

India 2020 – what will we be like
http://www.business-
standard.com/india/news/india-2020will-we-be-
like/381393/

India to overtake China in 2020
http://economictimes.indiatimes.com/Swaminathan-S-
A-Aiyar/India-to-overtake-China-in-2020-
Swaminathan-Aiyar/articleshow/5401241.cms

Inflation

6


• WPI All Commodities inflation has been rising rapidly
as the base effect has run out – stands at 4.8% for
November, while manufactured products inflation
stands at 4.0% - both provisional estimates.
• Latest primary articles inflation is at 15.5% for the
week ending 19th December while the group of fuel,
power, light and lubricants has turned positive, the
first time since December 2008.
• Consumer price inflation continued to go higher in
November – 13.51% CPI IW and 15.65% for CPI AL.
This is on top of a double-digit inflation for last
November.
• Crude oil traded in the range of $78.68 to $70.1 in
December, up by 85.6% over last December’s low
prices. While there is pressure on the govt. to raise
fuel prices domestically, there is some cushion
coming in from the rising rupee exchange rate so far.
• PMI survey reports pressure on manufacturers to
raise prices - steel prices have already been
increased in January, keeping with the buoyant
domestic market, auto makers are looking to raise
prices in line with rising input costs etc.
• Sugar surged again in the last week of December
with apprehensions that output estimates would not
be met.

Read
The price of oil in 2010
http://in.reuters.com/article/economicNews/idINIndia-4
5123220100104

Interest Rates

• The yield on the 10 year benchmark gilt rose in
December from being less than 7.2% in the last
week of November to touch 7.6934 on the 1st of
January.

7


• Rising inflation numbers as well as input price rise
raise concerns of rate hike by the RBI in the January
end review. While CRR is set to be hiked in all
probability, there is likely to be a rise in the reverse
repo of 25 basis points as the RBI will signal its
readiness to stem inflation.
• World-wide 2010 will see central bankers raising
rates, though the timing and quantum will depend on
individual domestic factors.

Read
Fed’s road to neutral is riddled with potholes
http://www.bloomberg.com/apps/news?
pid=20601039&sid=apuJ4PPRa2MM

Bank of Korea hints at rate hike in 2010
http://www.forextv.com/Forex/News/ShowStory.jsp?
seq=1168687&category=Economic+News

Exchange Rates

• BoP statistics released for April-September 2009 :
1. Lower trade deficit (US $ 58.2 billion) led by lower
oil import bills
2. Lower net invisible surplus (US $ 39.6 billion) led
by lower software services and decline in business
services and investment income
3. Higher current account deficit (US $ 18.6 billion)
due to lower net invisibles
4. Large net capital inflows mainly led by turnaround
in FII inflows and steady FDI inflows
5. Increase in reserves (excluding valuation) of US $
9.5 billion (as against a decline in reserves of US $
2.5 billion in April-September 2008) due to large
capital inflows and SDRs allocations by the IMF

8


• Exports during November 2009 valued at US $13.199
billion, 18.2 % higher in dollar terms and 12.4 %
higher in rupee terms than last November.
• Imports in November 2009 are provisionally
estimated at US $22.888 billion, lower than last
November by 2.6 % in dollar terms (minus 7.4 % in
rupee terms)
• Oil imports during November 2009 were valued at US
$6.389 billion, 7.3 % higher than last year. Non-oil
imports at US $16.5 billion was 5.9 % lower than last
November.
• The trade deficit for April- November, 2009 was
estimated at US $66.183 billion which was lower
than the deficit of US $ 100.152 billion during April-
November, 2008.
• FII net inflows in equity markets of $ 2.198 billion in
December brought the total of net inflows in 2009 to
$17.457 billion.
• Forex reserves for India stand at $ 283.499 in the
week ending 25th December 2009.
• The rupee has been fairly stable in December,
moving in the range 46.2 – 46.9 to the dollar and is
expected to stay within the 46-47 range in January.

Read
Major currency risk in 2010
http://www.emecklai.com/JoyToTheWorld.aspx?
Type=C22

Recommendations

Indicus IE Happy New Decade, India!

Strength in numbers

FE Person of the year – the rural consumer

9


Young and going it alone

The urban consumer – putting numbers to gut feel

The economic case for creating smaller states

Homing in on class A households

A developmental case for statehood

Worst may be over on food price front

Protect manufacturers from inflation – PMEAC

Understanding the Indian consumer

10


The
Emerging
Economy
Analytics
9th December 2009

Highlights
• 7.9% growth in second quarter powered by
govt, lower growth next quarter
• Growth in 2009-10 still estimated by us at
6.7%, agriculture well factored in
• As expected, exports decline even lower in
October, return to low levels of positive growth
by March
• Inflation hits manufacturing as well as
commodities rise on stronger growth
• Capital controls on the radar as inflows increase

11


From the beginning of this year, we have been predicting
a growth rate for 2009-10 at 6.7%. While most analysts
have been revising their estimates upwards throughout
this year, we maintain our growth estimate, despite the
high 7.9% release by the government for the second
quarter. There are two reasons for this – one, as the
government itself has pointed out, the impact of the
drought this year will make itself felt only in the Q3
estimates, when the kharif output is out, and two, the
high growth in the second quarter is largely powered by
public administration sector. In fact, if the community
services, public administration and defence sector is given
half its growth estimate of 12.4% in Q2, in line with
previous quarter’s growth, GDP growth comes down to
7%. The government and the Reserve Bank know this,
which is why a rate hike before January appears unlikely.

Rising inflation is leading to rising tempers in the
Parliament, not quite a healthy way to resolve an issue
that is hurting so many. Wholesale prices of many
essentials are up: milk by 8.27% since March-end, pulses
by 25.02% and though the sugar price rise has
moderated, it is still expected to rise after March as
supplies get tighter globally. So what is the solution here?
Market reforms in the supply chains of agricultural
produce have been mooted many times but not acted
upon enough. Improvements in storage and processing of
produce will also go a long way in improving supplies.

And there are more linkages being ignored in the inflation
story. Take for instance, the change in visa rules for
employment of foreigners last month. On the face of it,
this has nothing to do with inflation, but this is one
example of how the government creates hurdles in the
smooth flow of goods and services across the country. The
new rules have taken Chinese workers off a road being
constructed in Himachal Pradesh. A road bringing better

12


connectivity to the apple belt, which contributes 40% of
the state’s apple cultivation and which annually suffers
from wastage of Rs. 1200 crore due to poor
transportation.

The new visa rules in fact are a true symbol of how the
government works. One ministry has little to do with the
other, the impact of a policy change is not fully
understood, and the government effectively just treats the
symptom and ignores the underlying cause of the
problem. The main reason why foreigners with the same
skill sets as Indians are getting jobs here are because
efficiency and productivity, much needed by Indian firms,
are not a part of ‘skills’ as defined by the government. It
is of course easier to just change visa rules, rather than
change vocational training education on a large enough
scale to account for these deficiencies. But then again,
without any structural changes, talking of a 9% growth
rate becomes as unsustainable as the previous years.
Overall therefore, there will be some tempering of the
growth numbers next quarter. Inflationary pressures will
continue in the short, medium and long term.
Commodities will once again face inflationary pressures
and so will real estate. The economy is warming up, and
we see every reason for it to heat up in a couple of
quarters. The real challenge for macro management will
emerge in a couple of quarters.

Please visit our homepage for updated interactive time
series graphs of economic indicators and blog posts
throughout the month.

13



2nd December 2009, Indicus Analytics


Economic Growth

• GDP growth for the second quarter of this year
July-September has been estimated at 7.9% ,
with agriculture showing a positive 0.9%
growth, manufacturing at 9.1%, and the
services sector at 9.3%
• The highest performing sector was community
services and public administration growing at
12.7%, the impact of the Pay Commission
payouts.
• IIP for the month of September showed high
growth of 9.1%, manufacturing at 9.3%, mining
at 8.6% and electricity at 7.9%
• HSBC- Markit PMI showed a dip in November in
manufacturing activity, the index stood at 53
compared to 54.5 in October. New orders index
fell to 54.6, its weakest level since March
• Electricity generation grew by a mere 2.2% in
November, according to provisional data, while
final figures for October show growth at 4.67%.
• Car sales rose by double digits in November, as
Maruti recorded a 60% growth, Hyundai 93%,
Tata Motors 48%, while two wheeler sales were

14


powered by Hero Honda which saw its highest
sales ever in November – at 3.81 lakh units.
• Railway freight traffic increased by 11.72% in
October over the last year, a rise of 7.12% for
the period April-October
• Naukri Jobspeak index shows fall in hiring by
3.8% in the month of October over the previous
month. IteS, BPO, Pharma/Healthcare and
Banking are the sectors with positive hiring
growth in October.
• Cement production increased by 6.6% in
October over the previous year, while cement
despatches rose by 9.0%
• The Baltic Dry Freight Index rose to a 14 month
high, reflecting higher global activity, while
ports in India recorded 46.6 million tonnes of
volume in October, a rise of 11% yoy.

Read

In conclusion

Signs of a V shaped recovery

Inflation

• Reporting on the wholesale price index has
changed since November 14th – weekly data
released only on primary, fuel and light groups,
while data on manufacturing goods released on
monthly basis.
• Provisional WPI inflation for October stands at
1.3%, with manufacturing at 1.4%.
• Weekly rate for primary articles rose to 11.0%
while fuel and light group declined by 1.5%.
• Consumer price indices continue to show sharp
increases as these are heavily weighted by food

15


items – CPI AL inflation stands at 13.73% and CPI
IW at 11.49% in October.
• Crude oil touched a high of $78.64 in November,
the highest it has been since last October – crude
oil price averaged higher by 46.12% in November.
• While sugar price rise has moderated in the last
few weeks, the outlook for the year ahead is not
positive for consumers as supply constraints
plague the global market.
• HSBC-Markit PMI survey showed strongest rise in
output prices in November, since last September,
pointing to the pressures coming in from higher
input prices.

Read

Mixed veg – the real story on food prices

Sugar prices to stay high, may even rise after March

Interest Rates

• The yield on the 10 year benchmark gilt that had
fallen in the last week of November due to higher
liquidity rose sharply on the 30th of November to
touch 7.2798% on 1st December as the high growth
estimates pointed to a tighter monetary policy
ahead.
• The Reserve Bank is looking to make further moves
on its exit strategy but given the fact that growth is
still looking weak, rates would in all probability be
raised slowly from January onwards, depending on
the credit offtake and the inflationary pressures
coming in from manufactured items
• Reserve Bank of Australia tightened for the third
consecutive month, creating a record of three
straight increases.

16


• While Israel has gone in for a rate hike as well,
unexpectedly, Korea and Indonesia are still holding
out, Brazil has chosen to put a tax on short-term
capital inflows to discourage volatile capital
movements.
• The major banks of ECB, Bank of England and the
Federal Reserve are not expected to move on rate
hikes for another quarter at least, given the weak
growth in their economies. The fallout of the low
rates in the US, however, has been on the exchange
rate.

Read

Tighter capital controls in Asia inevitable

Exchange Rates

• Exports declined by 6.6% in dollar terms in October
over the previous year (minus 10.3% in rupee
terms), standing at $13.193 billion. Imports valued
at $ 21.994 fell by 15% in dollar terms( minus
18.4% in rupee terms) in October.
• Oil imports were lower by 9.3% in October while
non-oil imports were down by 17.2%.
• Trade balance estimated at $ 57.318 billion was less
than deficit of $87.827 billion for the period April-
October.
• This level of trade reflects the lower level of global
activity – a fall by 11.9% in trade volume according
to IMF estimates and lower commodity prices by
20.3%, oil prices have averaged 36.6% less than in
2008.
• However, this trend has already reversed and can be
expected to exert pressures on the rupee in the

17


months ahead. Copper has hit a 15 month high, gold
has surged to a record $1200 an ounce
• Forex reserves stood at $ 285.344 billion for the
week ending November 20th, a rise of $ 29.376 billion
over last year.
• FII investments to the tune of $1.183 billion in equity
and $ 0.147 billion in debt have taken the total net
investment since January 2009 to $15.258 billion in
equity and $1.375 billion in debt markets –
compared to a net outflow of $ 12.332 billion in
equity markets during the period April-November
2008.
• Capital inflows have pushed the rupee up – a high of
46.09 to the dollar in November and low of 47.13,
compounding the pressures coming in from a weak
dollar overseas.

Read

Has RBI been diversifying out of dollars?

Dollar/yen reversal in prospect

The great trade collapse

Recommendations

When foreigners build roads better

Experts raise growth predictions for India

A dining table drought

18


The Emerging Economy
Analytics
9th November 2009

Highlights
• Stronger recovery across the globe – trend to
continue at slow pace
• RBI refrains from rate hike in October, expect
action only after January
• Inflation in consumer prices continues
unabated, expect reduction in pressures only by
January
• Exports decline reduced, horizon appears
brighter
• Overall – a positive outlook on the economy
over the next quarter

Good tidings from across the globe as manufacturing
showed stronger signs of revival even in advanced
economies that were the epicentre of the crisis. India still
appears the brightest growth prospect for the year-ahead;
all estimates seem to be converging on a 6.5% growth
rate for the current year.

The stimulus package meanwhile will continue to stay, the
FM has said there are no immediate plans to even think of
an exit strategy, “I will take a view on it as and when we
are convinced that the economy has come out of the

19


worst situation and is in the firm path of recovery” he said
at the Economic Editors Conference in Delhi last week.
That begs the question what defines the path of recovery?
The simple long term problem remains – would a
‘recovery’ be sustainable if it has the same basis as the
previous high growth trend?

Engineering even this much of a recovery as we see now
has come at a cost. Tax revenues in September rose by a
bare 0.8%, and are down by 7.6% for the first half of this
year. Custom and excise revenue were lower by 33% and
23% respectively for the period April-September,
compared to last year. The fiscal deficit by the end of
September stood at Rs. 197775 crores, last year it was
Rs. 102654 crores. We think it is irresponsible to let
investment and consumption decisions continue to be
based on these current parameters. Everyone should be
aware that this is a ‘punch bowl’ that will be taken away
sometime and make appropriate plans. Monetary policy
too is looking worldwide at when and how to exit from the
current low rates, each country will take its path according
to domestic compulsions. But rate hikes are inevitable
sometime next year. The ‘happy’ times can only last a
short while.

On the agri front, with rains in October, the kharif sowing
recovered to some extent, though rice still remains badly
hit, the deficiency in acreage sown has dropped from 61%
in mid-September to 15% in mid-October. Sugarcane
production will be lower this year globally, heavy rain in
Brazil has left 10% of the crop unharvested. Raw sugar
prices can surge to 30 year highs by December-January,
according to some commodity analysts. Imports by India
therefore will bear the brunt of this price rise. Bitter-sweet
times ahead.

On the squabbling on the political front, the less said the
better.

20




9th November 2009, Indicus Analytics


Economic Growth

• IIP burst into double digit growth in August at
10.4% for the first time since October 2007. With
a low base effect from last year, this implies that
growth is trending back, albeit slowly.
• Manufacturing grew at 10.2%, mining at 12.9%
and electricity at 10.6%, showing well rounded
growth
• Infrastructure industries had slower growth in
September, at 4%, the same rate as last
September, with only the electricity sector
outperforming its last year’s growth.
• Electricity generation had low growth in October,
provisionally estimated at 3.97%.
• Final monsoon deficit for the country ended at
23% below normal. With post-monsoon rains in
October, water levels in reservoirs continued to
rise to reach 96.08 BCM , but were still 87% of
last year and 94% of the ten year average levels.

21


• For the kharif crop, sowing has recovered with the
late rains, down by 15.7% for rice, up by 5.6% for
pulses, while cotton has increased in acreage by
13.4%.
• The HSBC-Markit PMI survey showed a slightly
lower level of expansion in October at 54.5 levels
of the index, new orders index fell to 56.7 while
employment index rose to 50 and export orders
reached the highest level since August 2008.
• Indian Railways freight earnings rose by 7.5%
over the period April-September, with the Net
Tonne Kilometres rising by 8.4%.
• Employment is looking up, the Naukri Jobspeak
index showed a rise in hiring activity in
September, higher by 4% over August numbers.
• Auto sales continued their rise in double digits
through October, Maruti sales rose by 21%,
Hyundai rose by 41%, Tata/Fiat JV rose by 28%.
In two-wheelers, Hero Honda saw near flat sales in
October over last year, while Bajaj Auto had a
52% growth.

Read
Signs of global recovery reinforced by manufacturing data

Inflation

• As stated in the last newsletter, WPI final inflation
went into the positive territory from August itself,
as revisions are revealing.
• Provisional inflation for the week ending October
17th is 1.51%
• September consumer price data shows high
inflation at 11.64% for CPI IW and 13.19% for CPI
AL.

22


• Sugar prices have risen to a record high, up
31.02% since March end with estimates of lower
production this year. However imports are
scheduled to restrain the price hike.
• Steel prices have been cut and HSBC- Markit PMI
survey data for October shows a moderation in
both input and output price indices, giving some
relief to policy makers.
• Brent crude hit a high of $ 78.36 in October, as
global recovery has sent a spurt in the price. Last
October prices crashed from an initial $92 to $60
by the end of the month.

Read

Special PDS basket trimmed

Interest Rates

• With the October review setting hopes for a rate
hike, the 10 year benchmark gilt rose to 7.4404% on
23rd October, before calming down to 7.3004% at the
end of the month.
• While the RBI did not raise key rates, the SLR was
raised by one percentage point and a clear mandate
for raising rates in the near future has been set out.
• The RBI is expected to raise rates in early January,
essentially to curb inflation expections, however the
growth-inflation trade-off is being closely monitored
to restrict damage to recovery.
• Every country is looking at its domestic compulsions
to move towards an exit strategy: Australia raised
rates for the second month in a row

Read

Implications of Central Banks’ Exit Strategy

23


Monetary policy and fiscal consolidation

Exchange Rates

• Exports during September were valued at US $
13.608 billion, 13.8 per cent lower in dollar terms
(8.4 per cent lower in Rupee terms) than last
September, a deceleration of the negative trend.
• Imports during September were valued at US $
21.377 billion lower by 31.3 per cent in dollar terms
(27.0 per cent in Rupee terms) than last
September.
• Oil imports were 33.5 per cent lower than last
September while non-oil imports were lower by 30.4
per cent.
• Trade deficit for the period April- September stood at
$ 46.73 billion, compared to $76.1 billion last year.
• FII inflows continue, $1.947 billion in equity and
$1.48 in debt during the month of October.
• The RBI bought 200 tonnes of IMF gold to shore up
the latter’s finances. Forex reserves stood at $
285.52 billion on October 23rd, up $29.552 billion
from last year.
• The rupee surged to 45.8 to a dollar in mid-October
but has since fallen again to levels of 47-47.5, as the
dollar recovers some of its lost value.

Read
Indian exports decline least this year as global slump
eases

India shining, India scraping

24


Recommendations

A Rs. 60,000 crore scandal

India’s mollycoddled ironmen

India’s rural markets: myth or reality

RBI warns of inflation amid growth

Rising food prices drive inflation to 1.21%

Coarse cereals can do the job too

Gurgaon’s success masks Haryana’s woes

25


Analytics
7th October 2009

Highlights
• September rains bring fresh hope for rabi crop
in the winter
• Inflation moves into positive territory, expect
7% by March end for the WPI
• Lacklustre export scene to continue as
international recovery slow
• Infrastructure sectors show better performance
than last year – construction on an upswing
• Exit strategies discussed worldwide, timing and
pace to differ across countries
• RBI shows inclination to raise rates earlier than
other economies to reign in inflation
expectations

The festive season rolls in again and with it, the stock
market is busy spreading cheer. IIP numbers, as we had
expected are rising; the HSBC- Markit PMI survey
confirms expansion in manufacturing activity in
September with encouraging news on the new orders
front. Vehicle sales are also up and as the mood sets in
for rate hikes next year, credit markets are set to buzz
once more. From this month onwards great times are
expected at the consumer markets.

26


Exports though continue to reel under impact of
international slowdown, August data shows decline of
19.4%. We can expect this lacklustre scene to continue
through this year as global recovery is still slow, apart
from a few specific sectors where large companies are
diverting their international value chains towards India e.g
auto sector where we beat China in exports earning rave
reviews globally. In general, the up-trend appears to be
quite well spread across the country, while Mumbai seems
to be the most upbeat, on back of re-entry of international
capital via FIIs. Rains finally did show up and conditions in
the north-west are not as bad as expected a couple of
months back. There are therefore great expectations from
the rabi crop now.

One worrying issue that we have highlighted before is the
growing Naxal activity. Naxals are a response to a non-
functioning and badly performing state. The less one
trusts the state to act in a fair manner, the more clout the
Naxals get. There has to be a fundamental change in
governance to strike at the roots of this counter-
insurgency. Meanwhile, Naxals are concentrated in areas
with large tribal populations, and almost all large projects
in these areas are stuck. The government will be ‘forced’
to use greater force to counter the Naxals. But the point
remains that rehabilitation has never been a priority for
any government at the state or the centre, thus playing
into the hands of the Naxals. The impact at the macro-
level will play out with large projects being inordinately
delayed because no one really trusts the promises of the
government or private entities on rehab in any of the
tribal dominated areas in the eastern states.

Last month we explained why it is not in India’s long term
interest to tread the route of foreign loans even if the
option looked attractive in the short-term. Sooner than we

27


expected, though, the World Bank approved a loan of $4.3
billion in September – the second largest loan for a single
country in a single year. Interestingly, this loan is said to
be in support for India’s economic stimulus, a country that
the World Bank itself projects to be fastest growing
country in the world next year. Such support may be
comforting to some but we reiterate: high fiscal deficit
and a rising debt burden are hardly a recipe for
sustainable growth.

We begin the fifth year of this newsletter and would like to
thank all our readers for their feedback over the years.


6th October 2009, Indicus Analytics


Economic Growth

• Industrial production showed 6.8% growth in July
in the first estimates released by CSO. June output
growth was raised from 7.8% to 8.2% in the first
revision.
• Infrastructure industries continued to shine bright
in August with growth of 7.1% compared to 2.1%
last August. Cement at 17.6% and coal at 12.9%
were the star performers.
• Electricity generation in September grew by 6.7%
over the previous year, as per provisional
estimates by CEA.

28


• Rains in September brought the gross deficit in the
country down to 21% departure from normal. Yet,
floods in the south have threatened to wipe out
some of the gains.
• The main crop to take the hit this monsoon has
been rice, whose sowing was down 61.09% by 16th
September. However, with late rains, the rabi
crop is expected to do well.
• The HSBC-Markit PMI survey showed an uptick in
the manufacturing activity index in September to
55, new orders were also buoyant.
• Auto sales surged in September as car sales
reached a new high of 1.53 lakh units, higher than
the previous high of 1.29 lakh units sold in March
this year. – Hyundai posted its highest sales ever,
Maruti at 11% growth, Tata Motors at 23%,
Mahindra and Mahindra 37%, GM at 47% etc.
while motorcycle sales also grew at a brisk pace.
Hero Honda and TVS sold 4% more units in
September, while Suzuki sales grew by 26%.
• Indian railways carried 12.18% more freight traffic
in August compared to last year.
• 15.08 million new subscribers were added in the
wireless segment in telecommunications in the
month of August, bringing the teledensity in the
country to 42.27%.
• Naukri Jobspeak index showed a fall in hiring in
August over July levels by 3.6%, however it
appears that the general uptrend since April will
continue ahead.
• The Baltic Dry Index for Shipping has been
extremely volatile over the last year, raising
sufficient doubt about sustaining recovery in global
demand from China.

Read

29


EU debates crisis exit strategy

Is Baltic Dry a harbinger of doom?

Inflation

• WPI provisional inflation went into positive
territory from the week ending 5th September,
however with sharp upward revisions to July data,
it is likely that inflation was positive in August
itself.
• Consumer price data for August shows high
growth with inflation at 11.72% for CPI IW and
12.89% for CPI AL. CPI UNME inflation for July
stood at 13.04%.
• These high levels of inflation follow the high prices
rises in food commodities like sugar (44.5% yoy
for WPI week ending 19th September), cereals
(13.17%) and pulses (20.05%). Vegetables at
49.5% show the highest year on year rise.
• HSBC- Markit PMI survey data for September
shows output price index reaching a one year
high, indicating that higher input prices are being
passed on to consumers now.
• Brent crude has been quite volatile this month,
ranging between a low of $64.6 and high of
$71.56 per barrel. While these levels are still 30%
below last September’s prices, crude is still valued
at double the December 2008 lows.

Read

UPA’s Marie Antoinette Syndrome

30


Interest Rates

• The 10 year benchmark gilt which saw 7.4397%
yield on 1st September fell to a low of 7.0661% and
climbed up slightly touching 7.1981% on 1st October.
• While rate hikes are eminent the world over, the
exact timing and pace would differ from country to
country, depending on the growth and inflation
scenarios.
• Inflation in India has been pushed by primary articles
but the PMI survey indicating rising output prices is
not a comfortable sign for the RBI. Nor are the ‘back
in favour’ stock market and realty offers.
• On the other hand, non-food credit is still to look up,
currently at half the levels of the previous year.
• There is however a strong likelihood of the RBI being
pushed into raising rates by early 2010 to signal
their unwillingness to stomach year end inflation of
more than 4-5%.

Read

Bonds should rally- RBI Deputy Governor

Any HTM hike will be a blow to credit market

Policy continuity at RBI

Exchange Rates

• Exports during August were 19.4% lower than last
year in dollar terms (9.2% lower in rupee terms)
while imports fell by 32.4% in dollar terms (23.9% in
rupee terms).
• Oil imports were lower by 45.4% in August and non-
oil imports fell by 25.5%.

31


• Trade deficit for the period April- August stood at
$38.17 billion, compared to $60.73 billion last year.
• Balance of payments data for Q1 2009-10 shows that
despite net invisibles surplus with buoyant private
remittance inflows, the sharp decline in exports
brought the current account into deficit of $ 5.8
billion(compared to $9.0 billion in Q1 2008-09).
• Capital inflows showed a revival, especially foreign
investments, bringing around the capital account
from a negative balance in the last two quarters of
2008-09 to a positive balance of $ 6.7 billion in Q1
2009-10.
• Portfolio investment turned from net outflows of $
2.7 billion in Q4 2008-09 to net inflows of $ 8.3
billion in Q1 2009-10.
• With positive inflows and a weaker dollar overseas,
the rupee strengthened to touch 47.86 to a dollar on
1st October.
• The dollar has fallen 14% against a basket of seven
currencies since March but is set to rise, see Mecklai
article below.

Read

The calm after the storm

Giethner says ‘Very important’ to have strong dollar

Recommendations

Demand Curve :Cities of the West powering India

Fe- Indicus Policy Series – Let coal be green

How the states were ranked: State of the States 2009

32


Factbox: What it takes to rebalance the global economy

Activation de l'équité et l'efficacité grâce aux enchères en
Inde

33


Analytics
8th September 2009

Highlights
• 6.1% growth in 2009-10Q1, drought restricts potential ahead
• Construction and services power growth while manufacturing
picks up
• Need to target rabi crop as monsoon deficit stands currently at
25%
• Growth estimated at 6.6% this fiscal, inflation bigger worry
• While food price pressure will ease by winter, commodities set to
rise e.g steel

India: Kal, aaj aur kal

Throughout the gloom of last year, we have been optimistic about the
growth in India, our estimates of more than 6% growth this year were
amongst the highest while finance whizzes were busy forecasting dire
numbers in the range of 4-6%. In our January newsletter we had said that by
the second half of this year, there would be an overall improvement. We had
also cautioned that a deflationary situation that was being discussed was of
little import here where inflation would be the prime worry. As the months
passed and the revival became more apparent, estimates were rapidly revised
upwards, both of growth and inflation. Though some find this surprising,
we maintain, that this was all predictable, as was the downturn, and as is the
inflationary environment in coming months.

As we go ahead, growth will show ‘surprising’ levels, e.g. the IIP numbers
can get close to 10% - on the back of low base of last year, electricity and

34


mining are doing better this year, vehicle sales are soaring with domestic
festival demand etc. We see no reason to cheer though. The past year has
taken a heavy toll on the finances of the government and investment plans
in the private sector, consumer confidence has also been hit hard, while
inflation has eaten gaping holes in the common man’s wallet. Moreover, the
true impact of the poor monsoon will be known only by the year end. The
financial sector types meanwhile are having a field day once more, rapidly
pushing up spirits and stock markets. Some are even getting into debates on
whether this slowdown would take the shape of a V, U, W, or the
Riemann’s zeta function, as Bloomberg columnist Moynihan quipped.

It is important to remember though that the ‘green shoots’ which are
growing tall now have sprung up in response to fiscal stimuli and rate cuts
worldwide, not through any change in fundamental factors. Work is on
towards changing standards of regulation and supervision internationally,
but these will take time to be implemented. In the meanwhile, we have to
point out that we are now tired of stressing on one issue - that such high
levels of expenditures, in India and abroad, are inflationary whatever way
one tries to handle it. Expectedly, the rational components of financial
markets recognize this problem and we are seeing significant upward
pressure on interest rates. This is a natural outcome of government over-
spending.

There is a possibility that to get around this problem this government may
try to borrow from abroad. And if that happens on a large enough scale,
the final degree of freedom that the government will have, would have been
used up. We therefore do not support such an initiative, despite its short
term advantages of keeping upward interest rate pressures under check.
Note that India has done something similar in the past (during the Rajiv
Gandhi years) when it borrowed internationally and spent on unproductive
activities. For a few years things looked very good, but pressures were
building. The ruling conglomeration in the post Rajiv Gandhi years just did
not have the ability to handle the pressures so generated. We all know the
final outcome.

At the end of the day we cannot spend this much without paying for it one
way or another. And it is better to pay by way of lower investment, higher
interest and prices, rather than macro-economic instability. But the first
best solution remains the same - don’t spend on unproductive activities
please.

35


PS. Please visit our new homepage for interactive time series graphs of
economic indicators http://www.indicus.net/


8th September 2009, Indicus Analytics

Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus
Analytics. They can be contacted at sumita@indicus.net and
laveesh@indicus.net.

Economic Growth

• GDP estimates for 2009-10 April-June quarter put growth at
6.1%, the first rise in six quarters.
• Manufacturing recovered to post a 3.4% yoy growth in the April-
June quarter, compared to the negative 1.4% in the previous
quarter.
• While mining turned in a high 7.9% growth and construction at
7.1% showed an upturn, the highest growth in this quarter was
recorded at 8.1% by the service sectors of trade, hotels,
restaurants, transport, storage and communications, and banking,
financial and insurance services.
• Agricultural sector growth at 2.4% reflects last years rabi output.
Production is expected to drop this year on monsoon deficit.
• With rainfall deficient by 26% by the end of August, 278 districts
were declared drought affected.
• While water levels in the 81 major reservoirs rose in August, the
overall levels are still lower than last year and the 10year averages.

36


• Sowing of cereals was down by 14.1% on 21st August, compared
to the previous year, while pulses had risen by 7.4%. Cotton
sowing had increased by 12.3%, sugarcane had reduced by 2.9%.
• In August, electricity generation was 9.76% higher than last year,
according to CEA’s provisional estimates.
• Markit PMI survey showed the fifth consecutive month of
industrial expansion, at 53.2 in August, the index was down from
the revised 55.4 level in July.
• Car and bike sales soared in August, the beginning of the festive
season – Maruti car sales up by 29%, Hyundai rose by 13%, Tata
Motors and Fiat by 26%, Mahindra and Mahindrar by 42%; Hero
Honda saw bike sales cross the 4 lakh mark in August, up 36%
from last year.
• Infrastructure sectors in July showed poor growth overall at 1.8%,
compared to 5.1% last year, with just cement and coal clocking
high growth at 10.6% and 9.6% respectively.
• Cement production was 10.63% higher in July than the previous
year, while sales were up by 9.92%.
• Railway freight traffic rose by 5.83% in July over the previous
year, while revenue generated by freight traffic increased by 4.77%
during the April- July period, compared to the previous year.
• Naukri Jobspeak index rose in July by 1.6% over June hiring in the
country.
• Telecom subscribers in the wireless segment rose by 14.38 million
in July, while wireline subscribers declined by 0.13 million,
bringing tele-density in the country to 41.08 at the end of July.

Read

V defies economic pessimists seeing L, U, W

Why growth in bank credit is low

Green growth of 8% by 2030 possible

37


Inflation

• Provisional WPI inflation inched upwards in August, though still
negative at 0.21% for the week ending August 22nd. Upward
revisions continue for June estimates.
• Food is the prime driver for the price rise, and pressures are
expected to ease by winter once produce comes into markets.
• Sugar is the main worry with prices up 64% this year, and
production for the year ahead expected to be lower than last year
– while Indian output has been hit by less rain, Brazil’s sugar
output may be less due to heavy rains.
• Consumer price indices report double-digit inflation in July –
11.89% CPI IW and 12.90% for CPI AL – on a high 8-9% base of
last year, consumers have been caught in the grip of inflation.
• Spot prices of agri commodities on NCDEX have moderated
after 12th August, following a steep rise since 9th July. On
September 1st, the NCDEXAGRI stood at 7.65% higher than its
August 1st index level.
• While cement prices have fallen in August, steel prices are set for a
hike as demand grows.
• Brent crude spot price in Europe climbed up to $ 74.34 a barrel
on August 24th as signs of economic recovery across the world
came in.

Read

India sugar hits record high

Interest Rates

• The 10 year gilt yield moved above 7% in August and touched
7.4397% on September 1st.
• Interest rate futures have been launched again on NSE, bringing
more depth into the bond markets.
• With inflationary pressures in the system, high borrowings and
recovery of the economy, RBI is expected to raise rates by the year
end.

38


• Central banks worldwide have now reached the end of their rate cut
cycle, poised to raise rates depending on how the situation evolves
and are going slow, to avoid pinching the growth revival.

Read

Interest rate futures - a big step ahead

Cant judge path of potential rate hikes

Exchange Rates

• Exports were lower by 28.4% in July in dollar terms, compared to the
previous year while imports were lower by 37.1%
• Oil imports in the month of July were valued at 55.5% lower than the
previous year while non-oil imports fell by 24.5%.
• The trade balance for the period April-July 2009 stood at $ 28.913
billion, compared to $ 41.093 billion last year.
• FIIs made a net equity investment of $ 1.008 billion in the month of
August, compared to the outflow of $ 0.268 billion in August 2008.
• The rupee traded in the range of 47.54 to 48.98 to the dollar through
the month of August.
• Most major currencies have been rising against the dollar recently as
the surging US deficits have been a source of concern, while growth,
especially in Asia, Germany and France have exceeded expectations.

Read

Unconventional wisdom

Recommendations
Demand Curve: The rapidly growing stable markets of southern India

FE-Indicus Policy Series: Piped or handpumped

Demand Curve:NE India- small, but with great prospects ahead

Drought may stall food security act

Drought not likely to shrivel India’s growth

39


Demand Curve: North India geography of growth

Paid location-based-services struggle to find favour

The numbers are misleading

Demand Curve: East India set to make swift progress

FE-Indicus Policy series: Why doesn’t Infosys innovate

Demand Curve: Rural markets help makers of consumer goods grow steadily

40


Analytics
6th August 2009

Indian Economy Next Quarter

Rains still not favouring India’s granary in the northwest,
August rains key now
Pressure on pulses prices set to ease with imports and
higher crop by winter
RBI holds rates, but inflationary pressures will force its
hand by last quarter
Commodity prices set to rise as global growth signs turn
more positive
High government borrowings pushing bond yields upwards
Subdued dollar as emerging economies show more
promise this year

India : Kal, aaj aur kal

As we have been emphasising in the past few newsletters,
despite the negative WPI inflation numbers, all is not calm
on the inflation front. Right now attention has focused on
inflation in food articles and manufactured food products,
standing provisionally at 9.7% and 8.5% for the week
ending July 25th. Consumer price indices for June are also
registering higher inflation than previous months, CPI AL
for instance stands at 11.52% inflation; this is on top of
the 8.77% rate in June 2008. Clearly, the government’s
‘touchy feely’ talk on being the saviour of the poor has

41


been negated by inflation. Could the government have
done anything different? We believe it could have and
should have. By preferring to reduce emphasis on the
consequences of a high fiscal deficit on inflation, the
government has done a great disservice to the country.

This quarter’s story will be repeated for many quarters to
come. Though the focus on price rise will change from
product to product over time, there is no doubt that we
are heading for higher levels of inflation in general. Right
now the story is about pulses, and within that mainly tur.
Prices of tur or arhar have risen 45% in the WPI since Jan,
other pulses are in double digit rises, except gram. The
problem with tur specifically is because last year’s output
was 25% lower than the previous year. But tur being a
crop that survives when rain is inadequate, going ahead,
the high prices and low rain have already raised acreage
sown under this crop this year. Import tenders have also
been floated, pressures on the prices of tur will therefore
lessen by winter. Meanwhile rain is still deficient in the
granary of India, but stocks of rice and wheat are high.
The problems therefore appear less this year but will
aggravate in the year ahead, especially if rains fail the Met
prediction in August.

As we have said time and again, the time is past for just
pushing money in the hands of people, without raising
production and productivity levels – If Punjab and
Haryana get through this poor monsoon with a halfway
decent crop, it will be thanks to the irrigation systems set
in years or decades ago. So what can a soft-hearted
government do?

Economic policy requires hard headedness at its very
foundations. Want to give 100 rupees to the poor? Go
ahead, but get Rs. 100 productive asset out of it. Want to
give more money to government servants? Then get them
to deliver that much. And it is possible to do so. A large

42


majority of government staff provide services of some
type – education, health care, water supply, safety and
security, justice, etc. Their output is measurable and it is
possible to link salary increases with their output
improvements. And all of these have direct productivity
benefits for the country. But we hear of no such talk.
What is this government scared of? It has no opposition.

Issues of inflation, upward pressures on interest rates,
weakening currency apart from pressures on the fisc are
here to stay for many years to come. The point is we are
stuck with higher levels of inflation in the year ahead, the
RBI has already raised its estimate to 5% and will need to
raise it further still as time goes by; one after the other,
more spikes will be seen in some products which might
eventually abate, but overall inflationary pressures cannot
be wished away. As global growth picks up, prices of
commodities will also pick up, thereby impacting the
manufacturing sector pricing as well. It is better we are
prepared for all of this. Governments internationally had
gone in for unbridled spending in the past, hoping that
growth will create a pie large enough, but when that did
not pan out, the poor and underprivileged had to suffer
the most. Soft-heartedness and hard-headedness can go
together.

Sumita Kale is Chief Economist, and Laveesh
Bhandari is Director, Indicus Analytics. They can be
contacted at sumita@indicus.net and laveesh@indicus.net

Economic Growth

IIP showed subdued but better growth in industrial sector
in May at 2.7% provisionally, with February’s growth was
revised upwards from the initial negative 1.2% to a final
positive 0.7%.

43


Infrastructure sector performed well in June, raising
production by 6.5%, as compared to the growth of 5.1%
last year – cement, electricity, crude oil and coal outdid
their previous year’s growth rates in June.
The Markit PMI Survey shows July output levels in the
manufacturing sector at similar levels to June, the index
stood at 55.3 indicating growth. The new orders index
rose to 59.75, the highest level in nine months.
The Fourth Advance Estimates for 2008-09 agricultural
production puts growth in foodgrain output at 1.3% higher
than the previous year, compared to the last estimate that
showed negligible increase in output.
Wheat production is now estimated higher in 2008-09 by
3%, compared to the previous estimate of a decline by
1%.
Pulses output fell by 0.7% as tur took a substantial hit last
year, sugarcane fell by 22.1%, cotton by 10.5% and
groundnut by 23.4% - putting pressure on prices of these
commodities this year.
Cement production in June rose by 13.01% while
dispatches rose by 12.84%.
Media reports indicate that Maruti sales rose by 33.36% in
July over the last year, Mahindra and Mahindra reported
vehicle sales growth by 22.04% while Honda car sales
rose by 11.99%.
Rail freight traffic increased by 9.59% in June over the
previous year, higher than the 7.81% growth clocked in
June 2008.
Data from Airports Authority India shows that
international passenger air traffic to India has picked up,
rising by 3.9% in May over last year, while domestic
passenger air traffic has continued its decline by 5.9%
over last May.
Domestic freight however has risen by 3.5% in May over
the previous year, while bad export markets continue to
dog international freight, which declined by 4.3% in May
2009.

44


Hiring in companies increased in June, over the previous
month, according to the Naukri Jobspeak Index, which
began conducting the survey in July 2008.
Rains in July increased the water levels in the 81 storage
reservoirs monitored by the CWC, however, storage levels
are still less, at 78% of the 10 year average.
Except for tur dal, maize and cotton, most crops are
reported lower acreage sown so far, bringing the total
kharif acreage sown by 24th July to 7.9% less than the
area sown the previous year.

Read:Bullish on China, India: Nouriel Roubini

Inflation

Provisional WPI estimates put inflation for the week
ending July 25th at a negative 1.58%. However significant
upward revisions have raised May inflation estimates by
one percentage point.
In June consumer price inflation rose, with the CPI AL
recording 11.52% yoy and CPI IW at 9.29%.
NCDEXAGRI index of spot prices of agricultural
commodities has risen by 8.35% over the period 11th
July-1st August.
Prices of tur and sugar have been rising over the past six
months on lower production last year.
International crude oil prices climbed down to touch
$58.25 a barrel on July 13th, but have since risen in the
range of 65-70 by the end of July, on positive global
economic data.

Read: When will tur dal touch Rs. 100/kg?
Read: Anxiety over food inflation

Interest Rates

45


The 10 year benchmark gilt touched a low of 6.7978% on
July 17th but rose again to 6.9691% on July 31st.
While the RBI kept rates unchanged in its July end Credit
Review and signalled intention to maintain an
accommodative stance in liquidity, there was emphasis on
the need to begin withdrawing the looser credit policy, in
tandem with the government fiscal stance.
Rates therefore are seen to edge upwards by the end of
the fiscal, if growth and inflation estimates move higher.
High government borrowing, higher oil prices and a build
up in inflation will put an upward pressure on bond yields.

Read: Global Financial Crisis- Questioning the questions
Read: Bank Chiefs should tell Alistair Darling to stop
meddling
Read: Bernanke broke rules, Paulson fumbled, Fed
managed great panic

Exchange Rates
Exports in the month of June were 27.7% lower than the
previous year in dollar terms and 19.4% lower in rupee
terms, while imports fell by 29.3% in dollar terms and
21.2% in rupee terms.
Oil imports were 50.6% less in June compared to the
previous year, while non-oil imports fell by 16.5% on
account of slower growth this year.
Trade deficit for the period April-June 2009 stood at $15.5
billion, lower than the $28.6 billion last year, on account
of lower imports.
Forex reserves which had been falling due to capital
outflows with the global crisis have now an upward trend
since April, rising to $ 267.71 billion as on July 24th. This
is higher by $15.73 billion compared to March end and
lower by $38.89 billion over last July.
The dollar traded at its lowest against the pound and the
euro this year, on better than expected economic news
from Europe.

46


The rupee ranged between 48 and 49.5 to a dollar during
July, as upward pressure has been curtailed by the RBI
and a subdued dollar.

Read: Dr. Subbarao as Tiger

47


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48


Analytics
3rd July 2009

Indian Economy Next Quarter

Delayed monsoon spreads rapidly, MET deptt. hopes it will
hold-up.
Late monsoon and heat wave in June hits sowing for rice,
oilseeds and pulses – expect pressure on prices.
Growth heading upwards, monsoon and the US economy
could still be spoilers.
Government shows intention of reforms – implementation
and governance issues remain stumbling blocks.
Disinvestment is on the cards finally.
Fuel price hike with no debate augurs well for
deregulation.

India : Kal, aaj aur kal

The world is upbeat about India again. We are to be the
fastest growing economy in 2010 at 8%, says the World
Bank. So we finally get to beat China at the race, never
mind that China is way ahead of us in per capita income
and development indicators. In fact, this year, India is
projected to be the only major economy to show a
positive growth (2%) in steel consumption, according to
the World Steel Association.

The Economic Survey 2008-09 also sees growth in the
6.5-7.5% range this year, assuming a normal monsoon

49


and a bottoming out of US recession by September. This
is in line with our growth estimate of 6.6% given a few
months earlier. Returning to the high growth path of
recent years however needs significant reforms, says the
Survey and presents a formidable wish-list of measures.
Suffice to say, this hope will not materialise in the near
future.

But talk aside, inability to deal with upcoming risks is a
serious failing of our policymakers. We had predicted, in
our May newsletter, that crude would move away from the
$ 40-50 range of the previous months into a higher range
of $60-70, as expectations of global recovery became
stronger. Crude did trade in this predicted range in the
month of June. While we are glad that the fuel price hike
took place this time with less fuss and without countless
EGoM meetings, the fact remains that this hike does not
cover the increase in petro costs fully.

This is just one of several sectors that require more
efficient utilisation of public and private resources through
free pricing combined with vouchers/entitlements to the
deserving households for kerosene and gas. The Budget
needs to focus on these issues as much as it does on
taxation and government investment.

Our overall take on the forthcoming budget is that Pranab
Mukherjee will not go in for another fiscal stimulus, but
will aim to contain the deficit to 6% or below. There will
be announcements of a new scheme or two, but their full
implementation will be staggered over a few years (e.g.
Food Security Act), ditto expansion of the social sector
plans already in motion. Some tweaking on taxes aside,
we think it would be too much to expect much beyond the
usual from this Budget.

50


Dr. Sumita Kale is Chief Economist, and Laveesh
Bhandari is Director, Indicus Analytics. They can be
contacted at sumita@indicus.net and laveesh@indicus.net

Economic Growth

IIP for April posted a positive growth of 1.4% over last
year, while there were significant upward revisions in
previous months estimates. March growth was revised
from –2.3% to –0.8% and there is still one more revision
to go for the final number for March.
January IIP growth was revised to a final positive 1.0%
from its first estimate of negative 0.5%.
Infrastructure sectors showed a subdued growth of 2.8%
in May compared to 3.1% last year. Good performance
from coal(10.2%) and cement (11.6%) boosted the index,
while crude oil and petroleum refinery products declined
by 4.3% each.
The Markit PMI survey showed a slight decline in the
manufacturing output index in June, but still at 55.34 was
above the threshold of 50 that separates expansion from
contraction.
Provisional estimates of electricity generation for the
month of June show growth at 8.11%, compared to
2.55% last year.
Media reports good auto sales with Maruti and Hero Honda
leading the growth as before with 22.5% and 23.7%
respectively. However, in June others like Yamaha,
Hyundai, Tata and Fiat reported positive growth in sales.
During May, revenue earning freight traffic carried by the
Railways increased by 2.54% over last year. Revenue
earnings rose by 2.34% in the period April-May over the
same period last year, while Net Tonne Kilometres rose by
3.61% during April-May.
Telecom subscribers increased by 11.44 million in May,
bringing tele-density to 38.88% in the country.

51


Hiring according to the Naukri Jobspeak was lower in May
than in April, the index standing at 644 compared to 677
the previous month.
Delayed rains and heat have hit sowing for oilseeds and
pulses. Groundnut acreage sown was down 54.8% as on
June 19th, compared to last year, while Moong was down
35.2%.
Water level in reservoirs fell below the 10 year average in
March and reached alarming levels by June with lack of
rain. 11 reservoirs, primarily in Maharashtra and
Karnataka have no live storage.
Read:India’s growth engine gathers greater steam
Read:Two exceptions

Inflation

While provisional WPI inflation fell in the negative zone in
June, this was essentially due to the high base effect of
last June, when the fuel prices had been hiked in the first
week.
While upward revisions to the WPI estimates began for
February estimates, inflation for week ending 18th April
was revised from 0.57% to 1.62% while inflation for week
ending 24th April was revised from 0.7% to 1.75%.
Consumer price indices also registered an upswing for May
– CPI AL rose sharply by 7 points over April, bringing
inflation to 10.21% while CPI IW went up marginally to
register 8.63% inflation.
With crude oil prices moving into the 60+ range in June,
even touching $ 70 a barrel, domestic petrol and diesel
prices were raised from July 2 by Rs 4 and Rs 2
respectively.
The Centre raised the statutory minimum price for
sugarcane by 32% in the end of June, this should reflect
in higher prices of sugar at the wholesale and retail level.
FAO Food Price Index has fallen one third since last June
peak but oilseeds and sugar markets remain tight as

52


production setbacks have raised prices since last
November.
Read: Certainly not deflation
Read: Commodity bubble would spark inflation: Assocham

Interest Rates
10 year benchmark gilt yields have been rising since the
end of April as the pressure of higher borrowings impacted
the market.
Government borrowing increased from the planned Rs.
241,000 crore for H1 2009-10, to Rs. 259,000 crore.
Going forward, the Budget on July 6th will determine
trends as the exact size of disinvestments and borrowings
for the year will be set out.
On the interest rate front, the RBI has been caught by
mixed signals coming in on the inflation and growth front
- CPI still registering high inflation, WPI showing low
levels but an uptrend, manufacturing off the negative path
but slow growth forecast ahead.
A rate cut by the RBI of 25-50 basis points in the July end
review could well signal the end to the rate cut cycle.

Read: RBI says reduction in interest rates a complex issue
Read: Government may borrow Rs. 40k crore more in
FY10

Exchange Rates

Exports fell by 29.2% in May compared to last year
(18.4% in Rupee terms), while imports fell by 39.2% in
dollar terms(30% in Rupee terms).
Oil imports were lower by 60.6% while non-oil imports
also registered a decline of 25.4% in May, reflected the
slowdown in the economy.
Trade deficit for April-May period was estimated at $ 10.2
billion, compared to $ 19.8 billion for the same period last
year.

53


With decline in imports, the current account deficit moved
into surplus in the Jan-Mar quarter of this year, but stood
at $29.82 billion for 2008-09, 2.6% of GDP, compared to
$17.03 billion (1.5% of GDP) the previous year.
Balance of Payments situation improved in the Jan-Mar
quarter to show a small surplus of $ 300 million,
compared to the $17.88 billion deficit in the previous
quarter.
Total external debt stood at 2 229.9 million at the end of
March, compared to $230.85 billion at the end of
December.
Foreign portfolio investment has been flowing back since
mid-March, which has pushed the value of the rupee up.
It is now trading at 47.72 to a dollar, compared to the low
of 52.2 in early March.
Read: BRIC ambition to form a new world order
Read: Change the US can believe in

54


Indicus Products
please contact

New Delhi- 110002.
Phone: 91-11-42512400/01
www.indicus.net

55


Analytics
3rd June 2009

Highlights
• Economic slump has bottomed out – expect slow
recovery ahead
• 2009-10 growth forecasts will be revised upwards
by most as the year progresses
• Expectations of global growth resurgence fuels
commodities and crude prices
• Dollar dives, rupee surges to 47 - more trouble for
exporters ahead
• Fuel price deregulation on the cards
• But all is not well – and overheated stock markets
need to cool a bit


The numbers all seem to be looking up, the stock markets
all seem to be rising once again, and cheer is back. There
is spring in the air. One wonders what happened
suddenly to make everything so nice. Anyhow, things as
predicted are improving – largely because of heavy
government interventions internationally. The lower
interest rates in India are also starting to have their

56


impact – this was all predicted, as interest rate reductions
take some time to play out. But what is also predicted is
that things will take a few months more to stabilise - we
estimate growth for this financial year to be an unexciting
6.6%.

Meanwhile companies in many sectors will continue to be
cash starved, jobs will be lost, new hiring will remain low.
So while things will get better, don’t expect too much. The
trouble is that the situation was so bleak a quarter ago
that any small improvement has a big impact on our
collective psyche. The financial market types have just not
learnt anything – over-reacting is built in their DNA. Let’s
hope another bubble is not created.

At the same time everyone – including economists – is
blaming economists for not predicting the fall. But we
know of at-least ten well known economic thinkers who
were writing that something was going very wrong, these
‘good times’ were heading for a crash. Swami Aiyar of
ET, was actually week after week, increasing his
probability of crash figures. No one wanted to listen to
them then.

And now again, no one seems to listen when anyone who
has any sense is pointing out an impending crisis -
governments should not spend this much – we are
creating a bigger problem than we tried to solve.
Hopefully the new UPA government will be a bit more
conservative than the last one. The Budget should reflect
on the need to get back to some revised form of FRBM,
ideally with a roadmap. With growth looking up, it is time
for the government to begin to step back.

What worries us is the volatility in prices – whether in
crude, forex, commodities, grain etc. – the rupee which
had fallen below 52 to a dollar in early March has now

57


swung up past 47 to a dollar on 1st June. Crude which had
fallen to a low of $ 35 a barrel in December is now trading
close to $70. In May, the Reuters- Jefferies CRB
Commodities index rose 14%, its highest monthly gain
since 1974. Firms, governments and consumers must
keep themselves aware of the ‘surprises’ that the markets
can continue to throw at them, given that there are still
many unresolved issues lurking in the global economy.

In short, the financial and commodities markets are still
not working in a sane manner nationally and
internationally; don’t listen to the people who man them.
Don’t listen to the corporate bigwigs. Don’t listen to the,
yes, economists who say things are back on track. And
don’t listen to any government that says they have it all
under control. India will at the very least face two
pressures in the coming quarters and years – on the price
and forex rate fronts. And high deficits will not help.

But we have a good team running the show. We wish the
new government good luck in the months and years
ahead. We have high expectations from them.

PS. Please visit our new homepage for interactive time
series graphs of economic indicators
http://www.indicus.net/


3rd June 2009, Indicus Analytics

Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari
is Director, Indicus Analytics. They can be contacted at

58


Economic Growth

• GDP for 2008-09Q4 comes in at 5.8% with full
year growth at 6.7%, revised down from January
estimate of 7.1%.
• Q3 numbers were revised upwards from 5.3% to
5.8% growth as agricultural numbers were
stronger, as were community, defence and public
services growth.
• The Markit PMI survey of 500 firms (earlier known
as the ABN-AMRO NTC survey) showed resurgence
in May in manufacturing activity, with the index at
55.7 in May compared to 53.3 in April. More
importantly, the new orders index rose to 59.9,
the highest since September.
• IIP numbers for March showed a steep decline by
2.3% from last March, even as provisional
estimates for December and February were both
revised upwards.
• December IIP growth had been first set at a
negative 2%, now revised to a final minus 0.2%.
• April saw higher growth for cement production at
12.32% and sales at 13.03% exceeded March
growth estimates of 10.43% and 10.35%
respectively.
• Maruti and Hero Honda continue their winning
streak with double digit growth in May with 10%
and 23% growth respectively as their rural market
focus paid off. Other manufacturers, including
BMW are now relooking strategy in smaller towns
to boost sales.
• Telecom added 11.09 million subscribers in the
wireless network, bringing teledensity to 37.94.
• Recovery in the Baltic Dry Index , which measures
the shipping freight costs for commodities. This
index had hit an all-time high of 11,793 on May 20
2008, and breached a 22 year low of 663 in

59


December. It has now crossed the 3,000 mark for
the first time since October.
• Boosted by coal(13.2%), cement (11.2%) and
electricity(6.0%), April IIP for infrastructure
industries grew by 4.3%, compared to 2.3% last
April. Steel showed positive growth of 1.6% over
last April, when it had declined by 0.6%.
• Rail freight traffic increased by 3.05% in April over
the last year.
• Air passenger traffic going through a slump –
domestic passenger traffic fell by 15.4% in March,
while international passenger traffic fell by just
1.8%. In air cargo, international freight has fallen
harder at 5.5% in March, while domestic cargo has
dropped by 2.4% over last March.
• Naukri Jobspeak index on hiring fell again in April,
though April and May are usually low hiring
months. The index is down 32% from its July
levels. This index began in July 2008, there are no
year on year growth numbers.

Read

Shipping rates ride out the storm
http://www.business-standard.com/india/news/shipping-
firms-ride-outstorm/359726/

India’s 2009-10 growth forecasts to 7%
http://www.livemint.com/2009/06/01114926/India8217s-
200910-growth-f.html?h=E

60


Inflation

• While provisional WPI inflation has remained low
averaging 0.4% in April and May so far, it is the
upward revisions for March data that point to
inflationary pressures in the system.
• CPI numbers finally released put inflation lower
than previous months for CPI AL at 9.09% in April.
• April CPI IW however stands at 150, a rise from
the level of 148 which it had held since October
(except a dip to 147 in December). Inflation for
April therefore is 8.70%.
• Crude oil has surged back again sharply to cross
$65 a barrel and China has raised prices by 6-7%.
• NCDEXAGRI index shows a decline over the month
of May in spot prices of 20 agricultural
commodities. On 29th May, the index was higher
by 7.2% than last year.

Read

BBC World Service Food Price Index
http://news.bbc.co.uk/2/hi/business/8059560.stm

China raises prices 6% to7% on gasoline, diesel fuel
http://online.wsj.com/article/SB1243810342310
70303.html

A little hope a dangerous thing for commodities
http://www.reuters.com/article/ousiv/idUSTRE5512582
0090602

61


Interest Rates

• Yield on the 10 year benchmark gilt trended slightly
upwards at the end of May, touching 6.6941% on
29th May.
• With large government borrowings in the offing this
year and no official borrowing schedule out as yet,
yields are expected to harden slightly, even as there
is pressure on the RBI to cut rates further given the
low growth and inflation numbers.
• While corporates are asking for a 400-600 basis
point cut in lending rates, bankers are reluctant to
cut more than 50-100 basis points. (Read interview
with Dr. Mohan below for views on bank
compulsions.)
• Even though inflation numbers are low world over,
policy rate have now more or less reached stable
levels – Australia kept the rate unchanged at 3%,
South Korea, Thailand are seen as done with their
rate cuts, Bank of England is expected to hold rates
at the low of 0.5%.

Read

Interviews with Rakesh Mohan
http://www.livemint.com/2009/05/27173009/Government
-has-space-for-more.html
http://www.business-standard.com/india/news/weve-
handled-crisis-much-better-than-anyone-else-
inworld/359685/

Federal Reserve puzzled by yield curve steepening
http://www.reuters.com/article/wtUSInvestingNews/idUST
RE54U1NZ20090531

Factbox: Global Interest Rates 2009

62


http://www.reuters.com/article/usDollarRpt/idUSGLOBAL2
0090601

Exchange Rates
• Exports in April were valued at 33.2% lower in dollar
terms than April 2008 (16.4% in rupee terms), while
imports fell by 36.6% in dollar terms and 20.6% in
rupee terms.
• Oil imports at $ 3.6 billion in April 09 were 58.5%
lower than April 08, while non-oil imports at $12.1
billion were 24.6% lower than previous April.
• This brings the trade deficit interestingly, lower at
$5.004 billion in April 09 compared to $8.75 billion in
April 08.
• FII net inflows rose from $ 1300.70 million in April to
$ 4144.80 million in May.
• As capital inflows continued into emerging
economies, with better news from Asia, the rupee
surged up from its 50.22 to a dollar at the end of
April to 47.29 at the end of May.

Read

ECB’s Constancio sees no accelerated dollar fall

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Why some cities are getting younger and why some are
not

63


India is witnessing a durables revolution

Beyond the fields

Are speculators evil?

How cities define the size of households

64


Indicus Products
please contact

New Delhi- 110002.
Phone: 91-11-42512400/01
www.indicus.net

65


Analytics
3rd June 2009

Highlights
• Economic slump has bottomed out – expect slow
recovery ahead
• 2009-10 growth forecasts will be revised upwards
by most as the year progresses
• Expectations of global growth resurgence fuels
commodities and crude prices
• Dollar dives, rupee surges to 47 - more trouble for
exporters ahead
• Fuel price deregulation on the cards
• But all is not well – and overheated stock markets
need to cool a bit


The numbers all seem to be looking up, the stock markets
all seem to be rising once again, and cheer is back. There
is spring in the air. One wonders what happened
suddenly to make everything so nice. Anyhow, things as
predicted are improving – largely because of heavy
government interventions internationally. The lower
interest rates in India are also starting to have their

66


impact – this was all predicted, as interest rate reductions
take some time to play out. But what is also predicted is
that things will take a few months more to stabilise - we
estimate growth for this financial year to be an unexciting
6.6%.

Meanwhile companies in many sectors will continue to be
cash starved, jobs will be lost, new hiring will remain low.
So while things will get better, don’t expect too much. The
trouble is that the situation was so bleak a quarter ago
that any small improvement has a big impact on our
collective psyche. The financial market types have just not
learnt anything – over-reacting is built in their DNA. Let’s
hope another bubble is not created.

At the same time everyone – including economists – is
blaming economists for not predicting the fall. But we
know of at-least ten well known economic thinkers who
were writing that something was going very wrong, these
‘good times’ were heading for a crash. Swami Aiyar of
ET, was actually week after week, increasing his
probability of crash figures. No one wanted to listen to
them then.

And now again, no one seems to listen when anyone who
has any sense is pointing out an impending crisis -
governments should not spend this much – we are
creating a bigger problem than we tried to solve.
Hopefully the new UPA government will be a bit more
conservative than the last one. The Budget should reflect
on the need to get back to some revised form of FRBM,
ideally with a roadmap. With growth looking up, it is time
for the government to begin to step back.

What worries us is the volatility in prices – whether in
crude, forex, commodities, grain etc. – the rupee which
had fallen below 52 to a dollar in early March has now

67

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