The advance estimate of national income for 2011-12, released recently by the Central Statistical Organisation, points to a decline in India’s GDP growth rate, from 8.4 per cent last year, to 6.9 per this fiscal. Hurt by high inflation and decline in demand in interest-sensitive sectors, private final consumption expenditure, the largest component of aggregate demand, is expected to moderate to 6.5 per cent in 2011-12 from 8.1 per cent in 2010-11. Pace of capital formation is also expected to slip to crisis levels of 5.6 per cent. Indeed, even the latest industrial production figures with a meager 1.8 per cent growth for December, confirm the slowdown, with a worrisome de-growth of -16.5 per cent in the capital goods sector. While such moderation can in principle be tackled through demand augmenting policies, it leads to a strong possibility of reemergence of inflationary pressures once pent up demand from both consumers and industry show up. The service sector has again emerged as the prime mover; all the three broad groups under which the tertiary sector is classified in the national accounts statistics — trade, hotels, etc; finance, insurance etc; and community, social and personal services — are instrumental in pulling the real GDP up. Deceleration in the manufacturing and agricultural sectors, combined with a services sector growth is definitely inflationary. GDP deflator, a broad measure of inflation that includes services, has been estimated at 8.66 per cent, higher than the government/RBI’s estimate of 7 per cent WPI inflation by the end of March. Global food prices as per the FAO rose 1.9 per cent in January demonstrating the volatility in the international food markets; worries about weather conditions affecting 2012 crops in several major producing regions point to a further increase in February. Back home the agriculture, forestry and fishing sector is expected to record growth of just 2.5 per cent in its GDP during 2011-12, as against the previous year’s growth rate of 7.0 per cent. Within agriculture, the value of food grains production is expected to slow to 2.3 per cent as compared to 12.2 per cent in the previous agriculture year despite a record harvest of foodgrains, with new peaks in both rice and wheat production. This does not augur well for the supply-side. The Indian central bank has battled inflation through a high interest rate policy during the past fiscal and does not have much fire power left this time to tackle another surge in prices; indeed its rate reversal cycle may coincide with another bout of high global food price inflation. A production augmenting budget (and central bank policy) even if inflationary, is necessary for longer term development; this has to be backed-up by extremely prudent rationalisation and channelisation of subsidies to achieve the dual objectives of fiscal consolidation as well equitable distribution.
Monday, February 13, 2012
Thursday, January 26, 2012
RBI addresses liquidity concerns; keeps key policy rates and inflationary expectations firmly anchored
Responding to an acute and prolonged liquidity crunch, the RBI in its recent Review of Monetary Policy has reduced the CRR (Cash Reserve Ratio, the amount of cash that banks have to mandatorily park with it) by 50 basis points from 6 per cent to 5.50 per cent of deposits, infusing about Rs. 32,000 crore into the banking system to mitigate the effects of net liquidity drainage from the system. For the last 4-5 months, commercial banks put together were borrowing Rs. 1-1.5 lakh crores on a daily basis from RBI. Since mid-October 2011, pressures on liquidity were acute despite injection of liquidity worth Rs. 70,000 crore, exacerbated by the forex market operations conducted by the Reserve Bank in response to a sharp depreciation of the Indian currency. This is indeed a reversal of the central bank’s policy stance as RBI notes that it considers the CRR as a monetary policy instrument with liquidity dimensions. However, RBI held its key policy rates unchanged (Repo: 8.5%, Reverse Repo 7.5% and MSF at 9.5%; SLR at 24.0%).
The country’s central bank’s decision making has turned even more challenging in recent months as the global economic scenario has worsened with Europe’s debt crisis pulling down growth and trade estimates across the globe. India’s domestic investment has also been on a downturn posing risk to future growth and has partially showed up in latest GDP as well as IIP numbers, leading to significant lowering of growth forecasts; the RBI has also slashed its growth forecast for the current fiscal from 7.6 per cent predicted in October to 7 per cent. Price pressures on the other hand have shown signs of moderating with lower pace of increase in the WPI in recent months, lower financial year build-up of inflation and dampening month-over-month seasonally adjusted annualised (3 month moving average) rate of inflation. However, the RBI’s commitment to a reversal in key policy rates is restricted by certain issues in inflation trends; the sharp decline in primary food inflation reflects high base and seasonal moderation together with moderation in global food prices with the FAO Food Price Index in December 2011 about 13 percent below its historical peak in February 2011. The RBI rightly feels that the comfort may fade fast if policy and administrative actions, which encourage investment that will help ease supply constraints in food and infrastructure, are not forthcoming and if the anticipated fiscal slippage, which is caused largely by high levels of consumption spending by the government and poses a significant threat to credible inflation management, is not adequately addressed.
RBI’s recent policy measure has been greeted well by markets, industry and analysts alike. Going forward, though the RBI’s bias is now stated to be doveish, the timing of the rate reversal cycle remains difficult to predict as it would clearly depend on inflationary trends; global inflation is likely to be moderating given the fiscal austerity driven demand deficiency around the globe, but domestic price pressures may yet resurge through either rupee depreciation, energy price pass-throughs or any expansionary (consumption demand augmenting) measures taken by the government without adequately addressing supply-side issues. The government’s response in the forthcoming budget is to be watched, however, whatever measures are announced would take some amount of time and will to execute. Thus the waiting and watching continues.
Tuesday, January 17, 2012
Industrial production numbers do a 180 degree...
Industrial production numbers do a 180 degree
India's industrial production growth rate was back in positive territory at 5.9 per cent yoy for November 2011 reversing the downtrend of the previous five months and rebounding from a 28-month low of -4.74 (revised from -5.09) per cent in the previous month. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for November 2011, registered yoy growth rates of - 4.4%, 6.6% and 14.6% respectively. The cumulative growth in the three sectors during this fiscal, April-November, 2011-12 over the corresponding period of 2010-11 was -2.5%, 4.1% and 9.5% respectively; over April-November 2011, IIP grew 3.8 per cent, as compared with 8.4 per cent growth seen in the same period in the previous year. Growth has been broad-based in November as 17 of the 22 industry groups in the manufacturing sector showed positive growth during November 2011. The industry group ‘Publishing, printing & reproduction of recorded media’ showed the highest growth of 69.1%, followed by 41.8% in ‘Medical, precision & optical instruments, watches and clocks’ and 29.3% in ‘Food products and beverages’. On the other hand, the industry group ‘Electrical machinery & apparatus n.e.c.’ showed a negative growth of 38.7%. The rebound in IIP for November 2011 has been largely led by a sharp growth in consumer goods output, which recorded 13.1 per cent growth as against near stagnation in the previous month, however, on a very low base of 0.7 per cent growth in the previous year. Within the consumer goods space, consumer durables registered growth of 11.2 per cent compared with 7.2 per cent in November 2010. Consumer non-durables registered 14.8 per cent growth in November 2011 as against a decline of 4.4 per cent in the same month in the previous year. The manufacturing sector, which accounts for 75 per cent of the IIP, recorded 6.6 per cent growth in November 2011 against 6.5 per cent in the same month in the previous year and a negative growth of 6 per cent in October 2011. Capital goods output (a proxy for investment activity in the economy) fell 4.6 per cent in November 2011 compared to a 25.7 per cent growth in November 2010, however, a significant jump from the. 25.5 per cent fall in October 2011. Electricity generation recorded a strong growth of 14.6 per cent in November 2011 as compared to 5.6 per cent in the previous month and 4.6 per cent in the same month last year.
What other numbers say
Analysts and industrialists alike justifiably see the rebound in industrial growth as per November IIP figures to be driven by transient forces and stress that this recovery needs to be seen with caution as fundamental trends remain weak. Seasonal (festival) demand led inventory re-stocking, fluctuations in auto output and improvement in lead indicators had pointed towards a firmer production number, which has materialised but a moderation is expected given the overall slowdown in capital investment sentiment. According to data from the Centre for Monitoring Indian Economy (CMIE) new investment proposals in 2011 fell 45% to a five year low of 10.46 lakh crore, from 18.88 lakh crore a year earlier. According to a RBI study the overall performance of 2,643 select (non-government non-financial) listed companies showed some moderation during April-September 2011 wherein the sales grew by 20.8 per cent vis-à-vis 21.5 per cent during April-September 2010 and, growth in profits declined sharply as compared with the corresponding period of previous year largely on account of higher input costs and significant increase in interest payments. Profitability in terms of operating, gross and net margins contracted by 200, 140 and 190 basis points, respectively in the first half of 2011-12 over the corresponding period of the previous year. Interest burden of these companies increased by 5.0 percentage points due to a faster increase in interest outgo in comparison with gross profits. A study by CRISIL Research has revealed that the interest paying ability of 420 companies in the S&P CNX 500 Index (excluding BFSI and public sector oil marketing companies) has dipped to a five-year low. The median interest coverage ratio has fallen to 4.8 times in the July-September 2011 quarter against 7.8 times in July-September 2010; average interest coverage ratio for these companies in the past five years was 8.4 times. Overseas direct investments by Indian companies in the first nine months ended December of the current fiscal (2011-12) fell by 28.32 per cent to $25.25 billion as against $35.23 billion in the same period of last year, according to figures released by the RBI. As per the RBI figures, overseas FDI by Indian companies amounted to $33.89 billion in calendar 2011 as against $40.45 billion in 2010, indicating a decline of 16.2 per cent. Overseas investments by Indian companies stood at a one-year monthly low of $1.46 billion in December 2011; outbound FDI last month was almost 47 per cent less than the $2.74 billion in November 2011. Experts attributed the decline to the global economic slowdown and uncertainties surrounding funding of overseas investments. However, while Indian companies invested less abroad, the FDI inflows during the April-November period have risen to $22.83 billion compared with the FDI inflows of $19.43 billion in the last fiscal (2010-11). A report by research firm Venture Intelligence shows private equity firms made investments worth $10.11 billion in India during 2011 by way of 441 deals, compared to $8.1 billion through 362 deals in the previous year, taking their total investment over the past five years to about $47 billion. Interestingly, PE firms invested $2.68 billion into real estate firms during 2011, a 69 per cent jump vis-a-vis the year-ago period. PE investment in October-December, 2011, however, declined to about $1.4 billion across 105 deals from $1.8 billion across 88 transactions in the same period of 2010, largely due to economic uncertainty and the decline in equity markets. Rating agency Moody's Investor Services upgraded India's short-term foreign currency rating from 'speculative' to 'investment' grade. This has come in addition to last month's upgrade in the credit rating of government's bonds from 'speculative' to 'investment' grade. Thus, several other numbers swing between positive and negative for the Indian economy in the near term.
Inflation numbers on the positive side for now
Inflation numbers and inflationary expectations are now on the positive side; food inflation stayed in the negative for the second week running at -3.36 and -2.90 per cent in the last two weeks of December. WPI inflation, which has been softening over the past months, came down to a two year low of 7.47 per cent for December. However there is good reason to believe that as the high statistical base effect wears off, food inflation will jump back to levels of over 5% as major structural problems continue to persist; as the Planning Commission's principal adviser pointed out the structural issues that forced average food inflation to remain around 7% between 2004 and 2009 are yet to be addressed.
Non-traditional measures for revival?
Sunday, January 1, 2012
Foreigners (QFIs) allowed to invest directly in equities
Business Line : Industry & Economy / Banking : Performance scorecard of nationalised banks vs new private banks in Q2
Friday, December 16, 2011
RBI keeps all rates unchanged in December policy review
The RBI kept repo rate, at which it lends to banks, constant at 8.5%, reverse repo rate at 7.5. Cash reserve ratio (CRR) which is the amount of cash the banks have to maintain with the Reserve Bank of
Guidance is now biased towards growth if inflation continues on its projected downward trajectory; this indicates that if inflation threats are not further heightened, the RBI may start reversing its rate cycle after 13 consecutive increases in the policy rates, which have risen by 375 basis points since March 2010.
Thursday, December 15, 2011
Wednesday, December 14, 2011
Monday, December 12, 2011
Monday, December 5, 2011
India’s GDP Numbers Confirm Marked Slowdown
Private final consumption expenditure (PFCE) at current prices was estimated at Rs. 12,436.81 billion in Q2 of 2011-12 as against Rs. 10,712.21 billion in Q2 of 2010-11. Government final consumption expenditure (GFCE) at current prices was estimated at Rs. 2,223.56 billion in Q2 of 2011-12 as against Rs. 1,964.98 billion in Q2 of 2010-11. Gross fixed capital formation (GFCF) at current prices was estimated at Rs. 5,842.36 billion in Q2 of 2011-12 as against Rs. 5,456.60 billion in Q2 of 2010-11. The slowdown in private consumption is worrying; as India’s growth is driven by domestic consumption if this shows signs of coming off, then fear of a protracted slowdown may become real. PFCF (at constant prices) grew at 5.9 per cent in Q2, compared to 8.9 per cent in the similar quarter of last year. What is also surprising is the fact that, while export growth has held up well despite the deteriorating global economic scenario, import growth has halved in the second quarter to 10.9 per cent compared with 23.6 per cent recorded in the previous quarter.
The GDP figures are a vindication of the weakness already apparent in the industrial sectors, according to the Confederation of Indian Industry; industrialists have been dealt the double whammy of a gloomy external scenario and increasing borrowing costs at home. Output growth in eight core industries, including steel, cement and coal, , with more than one-third weight in the Index of Industrial Production, dropped to near-zero in October, a sharp decline from 7.2% a year ago, signaling the possibility of a sharp deceleration in industrial growth. The uncertain global outlook has led to the shelving of several projects, while tougher credit conditions have eroded corporate profits mainly through interest outgoes. The weakness in the Indian rupee, which touched a historic low of 52.73 against the dollar in November, has contributed to the woes of several importers and corporates; in 2011 so far the rupee has depreciated by 14.8 per cent against the US dollar. India’s headline inflation has remained above the 9 per cent mark for 11 consecutive months; businesses are finding it increasingly difficult to pass on price pressures to the consumer, without losing out on sales.
On the other hand, the fiscal deficit for the first seven months (April-October) of the current fiscal has already hit 75 per cent of targeted deficit for the entire year, according to data released by the Controller General of Accounts (CGA); the Centre has pegged the fiscal deficit target for 2011-12 at 4.6 per cent of GDP. With industrial output slowing down, not much growth is expected in advance tax collections and thus the possibility of a slippage in the fiscal deficit is not ruled out. The Finance Minister, however, has cautioned that too much emphasis on meeting the fiscal deficit target may hurt economic growth—a pointer that the government may refrain from any aggressive tightening on the expenditure front in a falling growth scenario. Central banks across the globe have turned dovish as growth has stalled; even the central bank of China has decided to lower the reserve requirement ratio (RRR or the amount of cash that lenders must set aside as reserves) at China’s financial institutions by 0.5 per cent in order to ease credit crunch that is stalling growth. The RBI has already indicated a neutral bias unless the inflation situation spins out of control.
Have a closer look at the GDP figures and more data in our forthcoming monthly statistical bulletin—E-UpDates.