Issues on Global and Indian Economy

Some disconcerting facts surrounding India’s slowing growth...

2012-02-13T09:34:00.000-08:00

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.

RBI addresses liquidity concerns; keeps key policy rates and inflationary expectations firmly anchored

2012-01-26T08:20:00.000-08:00

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.

Industrial production numbers do a 180 degree...

2012-01-17T09:26:00.000-08:00

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?

It is difficult to single out the role of RBI’s 13 interest rates hikes in controlling inflation as this downtrend in inflation is concurrent with retreating global commodity prices. Thus the timing of the rate reversal cycle is likely to be delayed till March, till the time there is more clarity on the inflation trajectory. The problem with growth revival is the fact that with fiscal deficit slated to overshoot the target 4.6 per cent by about 100 basis points, there is little fiscal lee way available for sops to industry or exporters to counter the high interest rate regime which have put industry in stress. Thus a slew of innovative measures are likely to be adopted to build on the current spate of good economic numbers to revive the economy without raising fiscal deficit even further; if well thought out and executed these could indeed provide a stronger base for growth in the medium term.

Foreigners (QFIs) allowed to invest directly in equities

2012-01-01T22:12:00.000-08:00

Wishing all our dear Readers A Very Happy 2012.............the New Year brings in a new regulatory move to broaden and deepen our stock markets.............

Business Line : Markets / Stock Markets : Foreigners allowed to invest directly in equities

Business Line : Industry & Economy / Banking : Performance scorecard of nationalised banks vs new private banks in Q2

2012-01-01T21:58:00.000-08:00

Wishing all our readers .........A Very Happy 2012!

Banking : Performance scorecard of nationalised banks vs new private banks in Q2

RBI keeps all rates unchanged in December policy review

2011-12-16T22:18:00.000-08:00

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 India as a percentage of their net demand and time liabilities (NDTL) has been maintained at 6%.

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.

RBI announces slew of measures to support the rupee

2011-12-15T22:22:00.000-08:00

Business Line : Industry & Economy / Banking : To support rupee, RBI tightens forward contracts

India's inflation eases to 9.11% for November 2011

2011-12-14T20:40:00.000-08:00

http://netindian.in/news/2011/12/14/00017685/indias-inflation-rate-eases-slightly-911-november-2011

India's Industrial output contracts 5.1% in October

2011-12-12T20:10:00.000-08:00

Business Line : Industry & Economy News : Manufacturing, capital goods drag down IIP

India’s GDP Numbers Confirm Marked Slowdown

2011-12-05T09:19:00.000-08:00

Indian economy expanded at its slowest pace in two years at 6.9% during the second quarter of fiscal 2011-12, compared with growth of 7.7% in Q1 of 2011-12 and 8.4% growth in Q2 of 2010-11. There was a significant downward revision in GDP growth rate of second quarter of 2010-11 from the earlier 8.9 per cent to 8.4 per cent. During the quarter, manufacturing sector growth slowed sharply to 2.7% in Q2 of 2011-12 compared with 7.8% for the previous year period. In Q1 of 2011-12, manufacturing sector grew at 7.2%.Agriculture growth also fell to 3.2% in Q2 of 2011-12 compared with 5.4% for the previous year period. It grew 3.9% during Q1 of 2011-12. Mining sector witnessed a drop of 2.9% during Q2 of 2011-12 compared with growth of 8% for the same period last year. It grew 1.8% during Q1 of 2011-12.Construction sector growth improved in Q2 of 2011-12 to 4.3% compared with 1.2% growth in previous quarter. However, Q2 growth was lower than 6.7% growth witnessed in last year period. Growth for electricity, gas and water supply registered a sharp rise of 9.8% in Q2 of 2011-12 compared with growth of 2.8% for the same period last year. It grew 7.9% during Q1 of 2011-12. Trade, hotels, transport and communication growth slowed to 9.9% in Q2 of 2011-12 compared with growth of 10.2% for the same period last year. It grew 12.8% during Q1 of 2011-12. Financing, real estates and business services growth improved in Q2 of 2011-12 to 10.5% compared with growth of 10% for the same period last year. It grew 9.1% during Q1 of 2011-12. Community, social and personal services growth improved in Q2 of 2011-12 to 6.6% compared with 5.6% growth in previous quarter. However, Q2 growth was lower than 7.9% growth witnessed in the similar period of last year.

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.

GDP growth slows to 9 quarter low of 6.9% in Q2

2011-11-29T22:41:00.000-08:00

Business Line : Industry & Economy / Economy : GDP growth slows to 6.9% in Q2

FDI in Retail—A Mixed Bag...

2011-11-27T22:00:00.001-08:00

The Indian government has finally paved the way for the entry of global retail giants into India. Foreign direct investment (FDI) of up to 51 per cent has been allowed in multi-brand retail. Simultaneously, the FDI limit in single-brand retail ventures has been increased to 100 per cent; the government had in February 2006 permitted 51 per cent FDI in single-brand retail.

The clearance comes with several riders; multi-brand foreign retailers need to make a minimum investment of $100 million in the country. They would be allowed to set up shop only in cities with a population of more than 10 lakh as per the 2011 Census; there are about 55 such cities so it means big retail chains can move beyond the metros to smaller cities. Foreign investors will be required to put up 50 per cent of total FDI in back-end infrastructure. Such infrastructure will include capital expenditure on all activities, excluding that on front-end units. Expenditure on land cost and rentals will not be counted for purpose of back-end infrastructure. Retailers will need to source at least 30 per cent of manufactured/processed products from small industries. However, there will not be any obligation on the part of retailers to source agricultural produce such as fruit and vegetables. The Government has also retained the first right on sourcing agricultural produce. In terms of single-brand retail, just one important condition has been added to the existing one. It makes 30 per cent sourcing from small and medium enterprises mandatory, as soon as the FDI limit exceeds 51 percent.

The Government believes opening up of FDI in multi-brand retail trade and further liberalisation of single-brand retail trade will facilitate greater FDI inflows besides additional and quality employment. It is being assumed that it would make eminent commercial sense for the retailers to source fresh produce locally. It is unlikely that retailers would undertake large-scale imports of agricultural products. It will also bring a lot of benefits to the consumers and farmers in terms of quality, price and removal of inefficiencies in the agricultural sector. The Government has maintained that farmers will get higher remuneration and FDI will help in the development of much needed logistics and cold chains in the country. All sections of Indian industry of course have welcomed the move as any such investment spurs up industrial activity.

Global chains may face problems in opening stores in 28 of the 53 cities which have been thrown open to retailers. A long deliberation had been keeping the decision on hold as political opposition as well as store owners voiced their concerns on the fate of the small retailers once global giants like Walmart, Carrefour and TESCO open stores next doors. However, there doesn’t seem to be much reason for such extreme concern. The Indian consumer is a quirky brand itself; after the initial excitement dies down most consumers may remain loyal to their very own corner store. We have seen brands like Spencer’s close shop in localities where thriving traditional shops existed, even in more elite localities in metros. Street fashion shops continue to be crowded despite the opening up of several clothes retailers in the metros. Given the large scope and size in the retailing business in India there is every possibility that both parties face initial difficulties but eventually gain some mutual benefits.

RBI Adjusts Stance to Reflect Deepening of the Global crisis...

2011-11-15T00:00:00.000-08:00

The RBI formulated its second quarter review of the Annual Monetary Policy for the year 2011-12 against a backdrop of decelerating domestic demand and growth, led by global economic sentiments. A slew of regulatory and developmental policy measures have been announced; these include new products to widen and deepen the financial markets and measures to increase financial inclusion and strengthen the banking system. The most important measure however, was the deregulation of the Savings Bank Deposit Interest Rate, which so far remained the so called last bastion of interest rate regulation in India. Though this could lead to both intra- and inter-bank deposit migration in the short-term, it is expected that the move will lead to efficiency in banks’ credit-deposit management and would benefit a large number of small savers in the country.

As inflation expectations are likely to be controlled due to previous policy measures as well as the slowdown in both global and domestic growth and demand, RBI has now shifted its stance from hawkish to neutral. This has provided significant breathing space for domestic financial markets and corporates who have been facing shrinking profits due to shrinking global demand, rising borrowing and input costs as well as fluctuations in foreign exchange rates. India’s October exports slackened to about 11 per cent from a peak of 82 per cent growth registered in July, widening the country's trade deficit to a four-year high. India’s industrial output growth for September has also decelerated, for the third consecutive month, to a mere 1.9 per cent the lowest reading in two years. Going forward, the developments—related to the sovereign debt crises across the globe, in the global financial markets and the actual trajectory of both global and domestic commodity prices—would determine necessary changes in the policy stance. The highlights of the Second Quarter Review of Monetary Policy 2011-12 is presented here :E-UpDates-November2011

The Hindu : Business / Industry : IIP dips to 2 year low of 1.9 per cent

2011-11-11T04:39:00.000-08:00

The Hindu : Business / Industry : IIP dips to 1.9 per cent

Business Line : Industry & Economy / Economy : Slowdown chill: Exports fall to 12-month low in October

2011-11-08T22:16:00.000-08:00

Business Line : Industry & Economy / Economy : Slowdown chill: Exports fall to 12-month low in October

Double Policy Impasse — Near Double Dip

2011-11-02T10:30:00.000-07:00

The global economy was feared to be on the brink of another recessionary phase, pulled down not only by stalling demand and growth arising from persistently high levels of unemployment in major advanced economies, but this time precipitated by a dearth of business and consumer confidence as showing up in various confidence indexes across the globe. This crisis of confidence, as it has been termed, sparked off by sovereign debt crises and a series of rating downgrades of the US and the Euro zone countries, intensified as policy making reached an impasse on both sides of the Atlantic. Unlike the first phase of the global financial crisis when policy makers had unanimously called for expansionary policies to avert crisis, this time around there is a clear divergence in policy stance of various stakeholders and analysts leading to standoffs on critical issues like raising the ceiling on US government debt or the Greek bailout.

In mid-May US national debt approached its statutory limit of $14.29 trillion and measures were taken to stave off a default until August 2. (The US government is able to auction off new debt typically in the form of US Treasury securities in order to finance annual deficits. However, instituted with the Second Liberty Bond Act of 1917, the debt limit places an absolute cap on this borrowing, requiring congressional approval for any increase or decrease from this statutory level.) A political impasse over reduction in defense spending and tax hikes that could be biased against the wealthy and tax reforms involving fewer deductions and loopholes for both individuals and businesses held the global financial system to ransom. A legislation to raise the US sovereign debt limit by at least $2.1 trillion through the Budget Control Act of 2011, was finally enacted a day before the threatened default. The deal puts in place measures to cut the US deficit by $2.1 trillion over 10 years with initially about $100 billion reduction when the deal passes and another $1.5 trillion to be agreed upon by the end of the year; the first group of spending cuts apply progressively over the years to the discretionary programs that are approved annually, with automatic triggers for cuts if the targets are not adhered to. Adding to the financial market turmoil, in early August the US lost its highest safety or AAA credit rating, potentially further increasing funding costs for US public debt and the cost of borrowing for consumers and investors; this triggered off a slide in the US and global equity markets and this time around even emerging markets were not spared. However, strong growth figures released last week have for now pushed back fears of another recession, however concerns loom large that the austerity measures taken to avert the debt crises though beneficial for reducing government debt, are in fact debilitating for growth and employment. Unless there is a significant expansion in business and consumer confidence and in private demand in response to these measures, recessionary tendencies may only aggravate.

The end of the policy impasse on the other side of the Atlantic doesn’t seem to be in sight. Escalating concerns over sovereign debt default in the Euro zone and in particular potential losses to banks holding this debt greatly impacted global financial markets and spilled over to economic sentiments across the globe. Differences within economies undergoing adjustment and those providing support impeded achievement of any quick solution; this precipitated a loss of consumer and business confidence. An emergency three-pronged deal was finally reached last week to fix the Euro zone's debt crisis: (i) Private banks holding Greek government debt which now stands at about 144% of GDP, will accept a write-off of 50% of their returns; (ii) the main euro bailout fund - known as the European Financial Stability Facility (EFSF) - is to be boosted from the 440 billion euros set up earlier this year to 1trillion euros; (iii) around 70 European banks will be required to raise about 106 billion euros in new capital by June 2012. It is hoped that this would help shield them against losses resulting from any government defaults and protect larger economies like Italy and Spain from the market turmoil. However, the Greek PM’s unexpected decision of calling for a referendum on the bailout agreement, whereby the people of Greece would decide whether or not the packages of austerity measures needed to qualify for bailout payments would be implemented, has now shocked the global economy.

India’s Growth — An Opportunity Missed?

2011-09-14T06:10:00.000-07:00

India’s industrial growth plunged to a 21-month low of 3.3 per cent in July; the 3.3 per cent year-on-year increase in the official Index of Industrial Production (IIP) — the lowest since the 2.3 per cent of October 2009 — has primarily been dragged down by capital goods. The output of capital goods nosedived into negative territory by 15.2 per cent in July as compared to a growth of 40.3 per cent in the same month last year. This manufacturing sub-segment has, in fact, been showing huge volatility, having grown by 38.2 per cent in June. However, even intermediate goods — a proxy for investment activity in the economy — registered a negative growth rate of minus 1.1 per cent in July as against a growth of 8.5 per cent in July, 2010.

Among the major IIP segments, Manufacturing, which accounts for more than 75 per cent of the index, rose by a paltry 2.3 per cent in July. Within manufacturing (besides capital goods and intermediate goods), the basic goods sub-segment grew by 10.1 per cent (against 4.4 per cent in July 2010), with consumer durables (8.6 per cent versus 14.8 per cent) and non-durables (4.1 per cent versus minus 0.9 per cent) also doing relatively well. The cumulative industrial growth during the first four months of this fiscal worked out to just 5.8 per cent (compared with 9.7 per cent for April-July 2010-11), with growth rates at 6 per cent (10.5 per cent) for manufacturing, 1.1 per cent (8.2 per cent) for mining, and 9.4 per cent (5 per cent) for electricity. For the April-July period, capital goods production grew by 7.6 per cent (against 23.1 per cent in the four months of 2010-11), with the corresponding growth rates at 4.2 per cent (18.4 per cent) for consumer durables, 4.9 per cent (3.8 per cent) for non-durables, 7.9 per cent (5.2 per cent) for basic goods and 0.8 per cent (10.1 per cent) for intermediate goods. Prime Minister's Economic Advisory Council (PMEAC) Chairman viewed that the industrial growth target for the current fiscal — projected at 7.1 per cent — will have to be revisited.

Such growth numbers are not unanticipated given the central banks 11 rate hikes since March 2010 in a yet to succeed effort at cooling inflationary pressures. The problem is that India’s growth reversal comes at a time when the global economic gloom unleashed by the sovereign debt crises in the European nations as well as policy deadlock in the US has taken on enormous proportions threatening another fallback of some developed economies into recessionary territory. Economic recovery appears to have come close to a halt in the major industrialised economies, with falling household and business confidence affecting both world trade and employment, while the risk of hitting patches of negative growth going forward has gone up, according to the OECD. The palpable negative fallout of the fresh global downturn is bound to be a fall in export revenues; as markets accounting for close to a third of India’s exports (the European Union and US together) are stagnating or falling back into recession. Demand from developing Asia (excluding China) and the OPEC countries which together account for another 40 per cent of India's exports are highly unlikely to remain unaffected by the downturn either. The fact that governments have fewer options to boost growth are driving both business and consumer confidence downward; this is also true for India as falling growth and taxes now leaves the government with much lesser room for expenditure to boost the economy and spearhead much needed infrastructure investment. The uncertainty in the business environment created by the repeated rate increases through the year has also affected hiring intentions of businesses. One cannot but feel that India has missed an opportunity to address several issues pertaining to infrastructural bottlenecks and inclusive growth, during the post-crisis revival years — such steps would have lent more credibility to the inflation fighting exercise as well as to India’s growth story.

India's Weakest Growth in Six Quarters

2011-08-31T11:57:00.000-07:00

GROSS domestic product (GDP) growth in India continued to slide falling to 7.7 per cent in the first quarter of the current financial year (April-June 2011-12), against a 7.8 per cent growth in the preceding quarter and an 8.8 per cent growth recorded in the first quarter of the previous year (according to the revised estimates based on the new series of IIP). The country's GDP at factor cost at constant (2004-2005) prices stood at Rs12,26,339 crore, as against Rs11,38,286 crore in the first quarter of the previous fiscal (2010-11), according to figures released by the Central Statistical Organisation (CSO). Sectors driving the first quarter growth include electricity, gas and water supply (7.9 per cent), trade, hotels, transport and communication (12.8 per cent), financing, insurance, real estate and business services (9.1 per cent). As per the latest estimates of the index of industrial production (IIP), growth in the index of mining, manufacturing and electricity slowed to 1.0 per cent 7.5 per cent and 8.2 per cent, respectively, in April-June 2011-12 against growth rates of 8.0 per cent, 10.3 per cent and 5.4 per cent, respectively, during the first quarter of the previous fiscal. GDP at factor cost at current prices is estimated to have grown 16.7 per cent year-on-year to Rs19,37,123 crore during the first quarter of 2011-12 quarter, against Rs16,59,708 crore in the corresponding period of 2010-11. The sector-wise breakdown showed that the construction sector had been one of the worst-performing parts of the economy.

Construction grew at 1.2%, down from 8.2% in the previous quarter, as rising interest rates and delays in planning approvals held up building projects. Agricultural output rose 3.9%, which was down from the previous quarter but above the level of 2.4% in the same period last year. Manufacturing grew 7.2%, an improvement from the previous quarter, but well below the 10.6% in the corresponding quarter of 2010-11.Private final consumption expenditure (PFCE) at constant (2004-05) prices is estimated at Rs7,95,683 crore in Q1 of 2011-12 against Rs7,48,395 crore in Q1 of 2010-11, while Government final consumption expenditure (GFCE) at constant (2004-2005) prices is estimated at Rs1,36,935 crore in Q1 of 2011-12 against Rs1,34,161 crore in Q1 of 2010-11. Gross fixed capital formation (GFCF) at constant (2004-2005) prices is estimated at Rs4,10,533 crore in Q1 of 2011-12 against Rs3,80,544 crore in Q1 of 2010-11.

The first GDP numbers for the current fiscal confirm several analysts’ assessment of economic prospects for the financial year which would involve further moderation in growth due to stricter monetary policy to curb inflationary pressures. Signs are already visible as according to data from the Centre for Monitoring Indian Economy, new investment announcements by companies have more than halved to Rs 32.5 lakh crore during April-June 2011 from Rs 71.4 lakh crore in the corresponding period last year as high interest rates, decline in demand and policy uncertainty have taken a toll. Declining investment can only aggravate inflationary pressures as supply–side bottlenecks increase. While the 7.7 per cent growth silhouetted against a murky

New Investment Announcements
Industry	Apr-Jun 2011-12 (Rs. Crore)	%change over April-Jun 2010-11
All	32,53,158	-55
Manufacturing	13,31,621	-52
Electricity	9,02,591	-61
Cement	30,000	-83
Services (Non-financial)	6,85,889	-59
Source: Times of India, 1^st Sep, 2011

global scenario seems impressive, given the estimated requirements that we spoke about in our previous blog, a 7.7 per cent and slower future growth could well jeopardize a lot of calculations on achieving deficit targets as well as infrastructure development and inclusive growth.

India’s Road to Fiscal Consolidation — Diversions Ahead

2011-08-26T23:01:00.000-07:00

Total public debt of the Indian government stood at Rs. 31.5 trillion at that end of June 2011 against Rs. 29.7 trillion at the end of March 2011 according to the June 2011 public debt management report released by the finance ministry. Central government debt rose nearly 6 per cent, but dropped as a percentage of GDP because of a revision in GDP estimates. The gross fiscal deficit (GFD) stands at 39.4 per cent of budget estimates (BE) during the first quarter of 2011-12 compared to 10.5 per cent at the same time last year. The major reason for a worsening fiscal situation is the fall in receipts, particularly non-tax receipts. Revenue and non-tax receipts were at 11.5 and 9.7 per cent of BE respectively during Q1 2011-12, compared with 29.3 and 78.2 per cent respectively during Q1 of last fiscal. The fiscal outcome during the first of quarter of 2011-12 indicates that all the key deficit indicators as percentage of budget estimates (BE) for 2011-12 were substantially higher than their levels during the corresponding period of the previous year because of lower revenue collections both from tax and non-tax sources. Gross tax collections during the quarter at 6.6 per cent of BE were lower than 8.3 per cent a year ago. In the direct taxes, corporation tax collections showed a negative growth of (-) 27.8 per cent while personal income tax increased by 6.5 per cent as against budgeted growth rates of 21.5 per cent and 16.2 per cent, respectively, for 2011-12. All the major indirect taxes (customs, excise and service tax), however, showed buoyant growth rates (37.7 per cent, 23.2 per cent, and 31.1per cent, respectively) during April-June 2011 as against budgeted growth rates (15.1 per cent, 19.2 per cent and 18.2 per cent, respectively) for 2011-12. This, combined with the facts that India's high savings rate allows a larger share for internal debt (90.3 per cent of public debt, at end-June 2011) vis-à-vis other countries and a small share of external debt along with a comfortable maturity profile improves the credibility of government debt and increases sustainability, gives some reason to rejoice.

India’s central bank in its recently published Annual Report has asked the crucial question whether the fiscal consolidation witnessed in the fiscal year 2010-11 is sustainable or not. The RBI mentions that the fiscal deficit ratios in 2010-11 turned out to be better than envisaged in the Union budget as the Central government’s gross fiscal deficit (GFD) was 4.7 per cent of GDP against 5.5 per cent budgeted. This compared with a GFD of 6.4 per cent of GDP in 2009-10 was indeed impressive. However, the RBI notes that a qualitative assessment of fiscal correction during 2010-11, raises concerns as improved fiscal position had a large temporary component arising from a business cycle upswing and one-off non-tax revenue gains from spectrum auctions, which resulted in the improvement in headline deficit numbers. Not accounting for the revenue proceeds of two main one-off items – spectrum auction and the disinvestment – the GFD/GDP ratio works out to be 6.3 per cent of GDP during 2010-11. Also, revenue buoyancy was supported by a cyclical upswing in the global and Indian economy that led to above trend growth. So the one-off gains and higher growth in nominal GDP of 20 per cent against the budgeted 12.5 per cent contributed largely to lower deficits. Moreover, not only did the correction in revenue account reflect more than- anticipated revenues there has been a spillover of subsidy expenditure from the last quarter of 2010-11 to the current fiscal year. Although the share of capital expenditure in total expenditure increased in 2010- 11 from 2009-10, it was marginally lower than the budget estimates. In particular, capital outlay-GDP ratio fell short of the budgeted ratio in 2010-11 and is still significantly lower than that achieved during pre-crisis period. Consequently, in outstanding terms, the Central government’s capital outlay (as ratio to GDP) as at end-March 2011 was lower at 12.9 per cent than 13.8 per cent a year ago.

Further, both internal and external dynamics could well alter the course of fiscal consolidation taken during 2010-11. The darkening external environment leaves little space for complacency as export revenues are very unlikely to remain elevated particularly if the downturn in the US and EU/UK affect the demand for exports, and particularly software exports, as also a prolonged recession like scenario in the developed world may destabilize India’s so far successful strategy of expansions in export destinations. Domestic demand is being curbed through tight monetary policy to fight inflation, however, the hardest hit has been investment demand which has started to show up in slowing growth and dwindling revenues. Growth projections have been revised down in the range of 8 to 7 per cent by several agencies (see www.ecofin-surge.co.in); falling growth and inflation eating into budgets leaves little room for any expectations of tax buoyancy. India has also lost some of its attractiveness as a destination for international capital flows due to staggering growth; short-term portfolio flows have seen reversals and the Indian stock market gains in 2011 have been much lower than some of the Asian markets. Given the strong positive relation between international flows and public debt, India should be wary as India’s public debt to GDP ratio is among the highest in the region (the ratio stands at 69.2 per cent for India in 2010, compared with 17.7 per cent for China, 26.9 per cent for Indonesia, 44 per cent for Thailand and 54.2 per cent for Malaysia, according to the IMF, WEO Database). On the other hand getting back to the concerns on the Indian economic outlook raised by RBI which mentions that apart from monetary tightening, complementary policies to lower inflation and inflation expectations need to be put in place including improved supply response for food, higher storage capacity for grains, cold storage chains to manage supply-side shocks in perishable produce and market-based incentives to augment supply of non-cereal food items, management of water as also technical and institutional improvements in the farm sector and allied activities. Further, the infrastructure gap of India, both in relation to other major countries and its own growing demand has been a key factor affecting the overall productivity of investments. As per the assessment of the Planning Commission, during the Twelfth Plan (2012-17) India may need infrastructure investments of over US$ 1 trillion. Fiscal consolidation and reorientation of expenditure towards capital expenditure is necessary to meet such targets. The RBI rightly points out that the challenges faced by the Indian economy that are constraining growth relate to education, health, energy, infrastructure and agriculture sectors, where public policy interventions are needed as markets by themselves may not be able to do enough to remove the constraints. Thus, we have reason to believe that addressing these concerns in all seriousness could well call for policies that lead to a diversion, may be a welcome one, in the road to fiscal consolidation.

Global Gloom — Decelerating Growth & Accelerating Deficits

2011-07-13T23:38:00.000-07:00

Recent global economic assessments and outlooks of major international agencies like the IMF, United Nations and World Bank, show slowing global growth and worsening of unresolved problems related to fiscal crises. The global economic growth after powering up to 3.9 per cent in 2010 will slow to 3.2 per cent, as high food prices, possible additional oil-price spikes, and lingering post-crisis difficulties in high-income countries pose downside risks, according to the World Bank. According to the UN new headwinds have also emerged in 2011; the earthquake, tsunami and nuclear crisis in Japan shook world financial markets and disrupted important global supply chains. The political unrest in Western Asia and North Africa has been a source of a renewed surge in oil prices and international prices of food and other primary commodities have also soared in the year.

The United States economy expanded by 2.9 per cent in 2010, driven mainly by domestic demand, while weaker net exports had a dampening effect on growth; the economy is expected to slow down or at best stagnate in the current year. In April 2011, Standard & Poor's downgraded its outlook on United States sovereign debt, underscoring the urgency for policymakers to set up a credible framework to address its public debt. According to the IMF, the deficit projection for 2011 has been revised significantly downward, as post–April 15 data on revenues have come in stronger (in part because of sizable capital gains in 2010) and expenditures have been more contained than initially projected. However, the situation stands nowhere near resolved.

In the Euro zone negative sovereign ratings actions have spread beyond Greece, Ireland, and Portugal further into other euro area countries reflecting concerns that it will be difficult to reach the political consensus necessary for fiscal consolidation and structural reforms, according to the IMF. According to the United Nations, the recovery in Western Europe continues at a modest and uneven pace. Industrial business confidence indicators have returned to pre-crisis peaks in early 2011, but economies will face strong headwinds during the remainder of the year: GDP growth in the euro area is expected to average 1.6 per cent in both 2011 and 2012. Germany is expected to grow by 2.9 per cent in 2011, while the countries most affected by the fiscal crisis—Greece, Ireland, Portugal and Spain—will either remain in recession or, at best, register very modest growth rates. The positive demand effects from slowly improving employment conditions will be dampened by the negative impact of fiscal retrenchment.

Policy Measures Adopted or Announced for 2011 in Selected European Countries
(Announced impact on 2011 general government balance in percent of GDP)

Country	Revenue and other receipts	Expenditure	Total
Greece	Reduction in tax expenditures, including property taxes and VAT; various measures to speed up collection of tax arrears and penalties; measures against fuel smuggling; renewal of Telecom licenses; and extension of airport concessions (2.4 percent of GDP)	Wage cuts and tariff increases in public enterprises; restructuring of public entities; reduction in public wage bill (e.g. through reduction in short-term contracts and attrition-based reductions in employment); health reforms (drug and other cost savings and increases in co-pay for hospitals); rationalization of entitlements, including means-testing of family benefits; and reductions in transfers to public entities outside general government, operational expenditures, and military deliveries (2.7 percent of GDP)	5.1
Ireland	Revisions to PIT bands and credits; integration of health and income levies into universal social charge; tightening of various tax reliefs on private pensions contributions; and reduction in tax expenditures (1.2 percent of GDP)	Reduction in public payroll and discretionary expenditure, non-progressive social welfare benefits and capital spending (2.6 percent of GDP)	3.8
Portugal	Increase in the VAT standard rate (by 2 percentage points) and PIT and CIT rates; broadening of the SSC base; introduction of a new tax on the banking sector; adoption of tolls; and revision of penalties and fees (2 percent of GDP)	Reduction in public payroll (cuts in wages and the number of employees); pension freeze; cuts in social transfers and improvement of means-testing; reduction in capital expenditures and intermediate consumption; savings in health/pharmaceutical products; and cuts in transfers to SOEs and local governments (3.7 percent of GDP)	5.7

Fiscal Monitor Update, June 2011, IMF.

Market concerns about debt sustainability remain acute in Greece, where spreads have risen by 600 basis points since end-2010, to almost 1,700 basis points in early June. In Ireland and Portugal spreads have risen by 100–230 basis points to reach more than 700 basis points. Contagion to other Euro-area countries has been more limited, with spreads broadly stable in Belgium, Italy, and Spain. Despite ongoing fiscal consolidation, however, spreads remain in the 140–260 basis points range for these countries. Purchases of government bonds by the U.S. Federal Reserve since end-2010 have amounted to US$500 billion—with total envisaged asset purchases of US$600 billion under the second round of quantitative easing slated to end in June—bringing its holdings to 15 percent of publicly-held government debt. Securities purchases by the Bank of Japan (BOJ) are continuing. The BOJ now holds 7½ percent of outstanding government debt. Meanwhile, there have been no further market interventions by the ECB since March; its holdings of government securities remain equivalent to 11 percent of the outstanding debt of Greece, Ireland, and Portugal. In contrast, the Bank of England essentially halted its net purchases of government debt about a year ago, though its stock of holdings still stands at 16 percent of outstanding U.K. sovereign debt.

At home the Indian economy has slowed down resultant on the tight monetary and fiscal policies needed for fighting accelerating inflation. The government has been banking on strong economic growth to help meet its deficit target of 4.6 per cent for the current fiscal, but a spike in global oil & commodity prices leading to a slowing economy and a rising subsidy bill could well upset the fiscal calculations. In a signal that the government is worried about the state of its finances, the finance ministry announced a host of other measures to reduce expenditure and restrict the fiscal deficit. The last time such measures were taken was in 2008-09 after the collapse of Lehman Brothers that pushed the global economy into recession, when the finance ministry had asked all departments to cut non-Plan expenditure by 10 per cent.

Another Move towards Market-Linked Interest Rates...

2011-06-13T22:19:00.000-07:00

Another Move towards Market-Linked Interest Rates — Reforms to Small Saving Schemes (NSSF)

A government panel, headed by RBI deputy governor Shyamala Gopinath, was set up to review the small investment schemes of post offices and banks. The panel has recommended — a 0.5% raise in the interest rate for post office savings account to 4% in line with the rate on savings bank deposits; raising the annual contribution limit in Public Provident Fund (PPF) to Rs.1,00,000, from the current Rs.70,000; discontinuation of the Kisan Vikas Patra; reduction in the maturity period of National Savings Certificates (NSCs) to five years from six, and introduction of a 10-year NSC scheme.

The panel has also advocated benchmarking of interest rates on other small savings schemes to rates of government securities of similar maturity with positive spread of 25 basis points for most schemes, while it proposes a 100 basis points spread for senior citizens' schemes, keeping in view its social objective, and a 50 basis points spread for the proposed 10-year NSC, keeping in view of its higher illiquidity.

The administered rates may be notified by the government at the beginning of every financial year based on the average yields on government securities in the previous calendar year. The Committee also agrees with an earlier recommendation made by the Rakesh Mohan Committee on placing a cap of 100 basis points so that the administered rates are neither raised nor reduced by more than 100 basis points from one year to the next, even if the average benchmark interest rates rise or fall by more than 100 basis points. This would keep in check undue volatility in the administered rates, which if approved will be effective July 1, 2011 .

The proposed benchmarks and the administered (/current) rates for various instruments are given in the following tables (Table 1 and Table 2).

As for the usage of small savings funds the panel recommends that the mandatory component of investment of net small savings collections in state government securities be reduced to 50%. States can access up to 80% of NSSF for financing their annual expenditure. (The funds are given as a 25-year loan carrying 9.5% interest, higher than market rates. It has been proposed that the tenure of these loans may be reduced from the current 25 years, so states might be able to minimise their interest outgo and borrowing requirement by opting for 10-year loans at lower rates.) The balance amount could either be invested in central government securities or could be on-lent to other states on basis of requirement or could be lent for financing infrastructure projects requiring long-term finance, according to the panel.

The share of small savings as a percentage of net financial savings of households increased sharply from 7.9 per cent in 1996-97 to 22.3 per cent in 2004-05. Thereafter, the share declined and even turned negative during 2007-08 and 2008-09 as the alternative savings instruments became relatively more attractive. The outstanding amount of collections under small savings stand at Rs. 7,93,447 Crore in 2010-11. The measures to reform the small savings plans offered by the government, if implemented, would help to ensure transparency, move towards market-linked rates and reduce the government’s fiscal burden.

RBI Unmoved by Pointers to Moderating Demand and Growth

2011-05-13T10:22:00.000-07:00

The RBI formulated its Annual Monetary Policy for the year 2011-12 against a backdrop of moderating demand and growth, however, uncontrolled inflation has led the central bank to raise its key policy rates, for the 9th time since March 2010 and this time, quite sharply. While the RBI’s strong hawkish stance and bias, has been lauded by many, several analysts have also expressed the view that it is time that the emerging economy’s central bank adds to its arsenal more specific weapons to fight inflation rather than simply sacrificing the growth momentum. The RBI has of course pointed to the need to adjust domestic energy prices in line with the rising global prices, in order to reduce misalignment of energy demand with prices. Energy price adjustments may raise inflationary pressures in the short term but should definitely help curb the twin (fiscal and current account) deficits through adjustment of demand to actual prices. The problem with the continued hawkish bias is that it is the infrastructure sector which suffers most leading to further supply bottlenecks fuelling and adding to inflation imported from overseas.

The Review states that :

According to the IMF WEO (April 2011), global growth is likely to moderate from 5.0 per cent in 2010 to 4.4 per cent in 2011. Growth is projected to decelerate in advanced economies due to waning of impact of fiscal stimulus, and high oil and other commodity prices. Growth in EMEs is also expected to decelerate on account of monetary tightening and rising commodity prices. Consumer confidence in major countries, which improved during January-February 2011, moderated in March 2011 on the back of higher oil prices.

The Indian economy is estimated to have grown by 8.6 per cent during 2010-11. The index of industrial production (IIP), which grew by 10.4 per cent during the first half of 2010-11, moderated subsequently, bringing down the overall growth for April-February 2010-11 to 7.8 per cent. The main contributor to this decline was a deceleration in the capital goods sector. The growth is projected to be in the range of 7.4 per cent and 8.5 per cent in 2011-12 with 90 per cent probability

According an RBI Survey (OBICUS), the order books of manufacturing companies grew by 7 per cent in October-December 2010 as against 9 per cent in the previous quarter indicating some moderation. The Reserve Bank’s forward looking Industrial Outlook Survey (IOS) shows a decline in the business expectations index for January-March 2011 after two quarters of increase. The services PMI for March 2011 showed some moderation as compared with the previous month.

The baseline projection for WPI inflation for March 2012 is placed at 6 per cent with an upward bias. Inflation is expected to remain at an elevated level (around 9 per cent in the first half of the year due to expected pass-through of increase in international petroleum product prices to domestic prices and continued pass-through of high input prices into manufactured products. Against this backdrop the Monetary Policy Measures announced are

The repo rate under the liquidity adjustment facility (LAF) has been increased by 50 basis points. Accordingly, it goes up from 6.75 per cent to 7.25 per cent.
As per the new operating procedure, the reverse repo rate under the LAF, determined with a 100 basis point spread below the repo rate, will stand adjusted at 6.25 per cent.
The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, gets calibrated at 8.25 per cent.
The Bank Rate remains at 6.0 per cent.
The cash reserve ratio (CRR) remains unchanged at 6 per cent of NDTL of scheduled banks.

Savings Bank Deposit Interest Rate

Pending a final decision on the policy of deregulating the savings bank deposit rate, it has been decided to increase the savings bank deposit interest rate from the present 3.5 per cent to 4.0 per cent with immediate effect.

Changes in operating procedures of Monetary Policy and several developmental and regulatory policies have also been announced. Detailed Highlights are presented in our monthly statistical bulletin EUpDates (contact for subscription: ecofin.surge@gmail.com)

Highlights of Economic Survey & Union Budget 2011-2012

2011-03-10T22:55:00.000-08:00

Overview of the Economy

GDP is estimated to have grown at 8.6% in 2010-11, with agricultural growth showing strong momentum and growing 5.4% compared with 0.4% last year, while manufacturing growth remained at the previous year’s level at 8.8%. Demand –side GDP measured in constant prices is estimated to grow at 9.7% in 2010-11. Compositionally positive shifts in demand are indicated with private final consumption expenditure picking up, government expenditure decelerating and a pick-up in gross fixed capital formation and net exports.
Exports in April-December 2010 up 29.5 per cent; imports up 19 per cent. Trade gap narrowed to $82.01 billion in April-December 2010.
Data on IIP exhibited sharp volatility in the current fiscal with growth varying from 1.6% to 16.6%. IIP growth during Apr-Dec is at 8.6%.
Services (excluding construction) growth slowed to 9.6% in 2010-11 from 10.1% in 2009-10.
Production of foodgrains in 2010-11 is likely to be 232.07 million tonnes as compared to 218.11 million tonnes last year.
Food inflation declined from a peak of 20.2% in February, 2010, to 8.6% in December, 2010.
In the current financial year (2010-11), overall average inflation from April-December 2010 at 9.4 per cent, is the highest recorded in the last ten years. WPI inflation which peaked at 11% in April 2010 has come down to 8.4% by December. Build-up in FY 2010-11 (April-Dec) at 6.11% is lower than the corresponding period of the previous year at 7.9%.
Gross Fiscal Deficit stands at 4.8 per cent of GDP, down from 6.3 per cent last year.
Saving has gone up to 33.7 per cent, while the investment rate is up at 36.5 per cent of GDP.
Net bank credit has grown by 59 per cent. Deposit growth was slow as real interest rates were depressed.
India’s external debt stood at US$295 bn. at end-September, increasing by 12.8% over end-March 2010.

Economic Outlook

Economy expected to grow at 9% in 2011-12 with a margin of +/-0.25%.
Inflation is expected to be lower in 2011-12 with the measures taken by both the Government and the RBI showing further lagged effect.
Current account deficit seen lower in 2011-12 with improvements in foreign trade and investment.

Budget Estimates for 2011-12

Gross Tax receipts are estimated at Rs. 9,32,440 crore an increase of 24.9% over the Budget Estimates (BE) for 2010-11. Non-tax revenue receipts estimated at Rs. 1,25,435 crore.
Total expenditure proposed at Rs. 12,57,729 crore, an increase of 13.4% over BE for 2010-11, with an increase of 18.3% in total Plan allocation and 10.9% in the Non-plan expenditure.
Effective Revenue Deficit estimated at 2.3 per cent of GDP in the Revised Estimates (RE) for 2010-11 and 1.8 per cent for 2011-12. Fiscal Deficit brought down from 5.5 per cent in BE 2010-11 to 5.1 per cent of GDP in RE 2010-11. Fiscal deficit seen at 5.1 percent of GDP in 2010-11; 4.6 percent of GDP in 2011-12 and 3.5 percent of GDP in 2013-14. All subsidy related liabilities to be brought into fiscal accounting.
Net market borrowing of the Government through dated securities in 2011-12 to be Rs. 3.43 lakh crore and an additional Rs.15,000 crore to be financed through Treasury Bills. Central Government debt estimated at 44.2 per cent of GDP for 2011-12 as against 52.5 per cent recommended by the 13th Finance Commission.

Tax Proposals

Direct taxes

Exemption limit for the general category of individual taxpayers enhanced from Rs. 1,60,000 to Rs. 1,80,000 giving uniform tax relief of Rs. 2,000. Exemption limit enhanced to Rs. 2,50,000 and qualifying age reduced to 60 years for senior citizens. Exemption limit for citizens, who are 80 years or above raised to Rs. 5,00,000.
Surcharge for domestic companies reduced from 7.5% to 5% and for foreign companies from 2.5% to 2%.
Minimum Alternate Tax (MAT) rate increased from 18% to 18.5% of book profits. MAT to be levied on developers of Special Economic zones (SEZs) and units in SEZ.
Concessional tax rate of 15% proposed on dividends received by the Indian companies from their foreign subsidiaries during financial year 2011-12.
Investment linked deduction extended to housing projects under a scheme for affordable housing and production of fertilizer.
DTC proposed to be effective from April 1, 2012.

Indirect taxes

The Budget has proposed to stay on course for transition to GST. Significant progress in establishing IT infrastructure for introduction of GST.
Central Excise Duty maintained at standard rate of 10 per cent.
Nominal Central Excise Duty of 1 per cent has been imposed on 130 items entering in the tax net.
Lower rate of Central Excise Duty enhanced from 4 per cent to 5 per cent.
Parallel Excise Duty exemption granted for domestic suppliers producing capital goods needed for expansion of existing mega or ultra mega power projects.
Peak rate of Custom Duty held at its current level.
Standard rate of Service Tax retained at 10 per cent, with proposals of expansion in the tax base.

Some Proposals Related to Infrastructure, Agricultural and Social sector Development

Allocation to infrastructure in 2011-12 increased by 23.2% over the previous year.
To boost infrastructure development in railways, ports, housing and highways, tax free bonds of Rs. 30,000 crore proposed to be issued by Government undertakings during 2011-12.
Allocation for social sector in 2011-12, proposed at Rs.1,60,887 crore amounting to 36.4% of total plan allocation and increased by 17% over the current year. Allocation for education increased by 24% over current year. Plan allocations for health stepped-up by 20%. Allocation for Bharat Nirman programme proposed to be increased by Rs.10,000 crore from the current year to Rs.58,000 crore in 2011-12. Plan to provide Rural Broadband Connectivity to all 2,50,000 Panchayats in the country in three years.
Credit flow for farmers raised from Rs.3,75,000 crore to Rs.4,75,000 crore in 2011-12.
Interest subvention enhanced from 2% to 3% for providing short-term crop loans to farmers who repay their crop loan on time.
NABARD's capital base to be strengthened by infusing Rs.3000 crore, as Government equity in a phased manner.
To attract investment in the cold storage sector, capital investment in the creation of modern storage capacity to be eligible for viability gap funding scheme of the Finance Ministry. Cold chains and post-harvest storage to be recognized as an infrastructure sub-sector. Full exemption from excise duty extended to certain machinery required for this sector.
To ensure greater efficiency, cost effectiveness and better delivery for of kerosene, LPG and fertilisers, Government to move towards direct transfer of cash subsidy to people living below poverty line in a phased manner.
Mortgage Risk Guarantee Fund proposed under Rajiv Awas Yojana to guarantee housing loans taken by Economically Weaker Sections and LIG households and enhance their credit worthiness.

For removal of production and distribution bottlenecks for items (constituting 70% of WPI basket of primary food articles) contributing to the recent inflationary pressure, allocations under the ongoing Rashtriya Krishi Vikas Yojana increased from Rs.6,755 crore in 2010-11 to Rs.7,860 crore in 2011-12.
Allocation of Rs.400 crore to improve rice based cropping system in Eastern India. Allocation of Rs.300 crore each to promote: 60,000 pulses villages in rainfed areas; 60,000 hectares under oil palm plantations; implementation of vegetable initiative; higher production of nutritious millets like Bajra, Jowar, Ragi and others; animal based protein production through livestock development, dairy farming, fisheries etc; and fodder development in 25,000 villages.
State Governments to review and enforce a reformed Agriculture Produce Marketing Act.

Some Proposals Related to the Investment Environment

Notified infrastructure debt funds to attract foreign funds for financing of infrastructure proposed; a reduced withholding tax rate of 5% (instead of the current rate of 20%) to apply to interest payment on the borrowings of these funds; and income of the funds to be exempt from tax.
FII limit for investment in corporate bonds issued in infrastructure sector raised.
Additional deduction of Rs.20,000 for investment in notified long-term infrastructure bonds extended
Disinvestment receipts for 2011-12 estimated at Rs. 40,000 crore.
SEBI registered MFs permitted to accept subscription from foreign investors who meet KYC requirements for equity schemes.
Discussions underway to further liberalise the FDI policy.
Amendments proposed to the Banking Regulation Act in the context of additional banking licences to private sector players to be considered.
Legislative changes to be introduced in Insurance and Pension funds sectors. Changes are also proposed to Acts related to bank debt recovery.
Self assessment to be introduced in Customs to modernize the Customs administration.
Proposal to introduce simplified scheme for refund of taxes paid on services used for export of goods.
Mega Cluster Scheme to be extended for leather products and handicrafts.
Recapitalisation for PSBs and RRBs include Rs.6,000 crore allocated to enable PSBs to maintain a minimum of Tier I CRAR of 8% and Rs.500 crore for RRBs to maintain a CRAR of at least 9% as on March 31, 2012.
Keeping in mind the recent problems related to Micro Finance Institutions, India Microfinance Equity Fund of Rs.100 crore is proposed to be created with SIDBI and Women’s SHG’s Development Fund to be created with a corpus of Rs.500 crore.
Rs.5,000 crore to be provided to SIDBI for refinancing incremental lending by banks to Micro Small and Medium Enterprises. Rs.3,000 crore to be provided to NABARD to provide support to handloom weaver co-operative societies.
Provision under Rural Housing Fund enhanced to Rs.3,000 crore.
Existing housing loan limit for dwelling units under priority sector lending enhanced to Rs.25 lakh.

The MFI Industry in India — from Micro to Macro?

2011-01-21T22:54:00.000-08:00

The operating style of many microfinance institutions (MFIs) in India has been criticised by several eminent policy makers. MFIs provide small loans to the poor who do not qualify for traditional banking credit, help lift them out of poverty and spur entrepreneurship. Rash and faulty practices both on part of the lenders and borrowers in the industry have now led to borrowers defaulting on payments and taking their lives and banks ceasing to lend to the cash-strapped micro-loan companies. Collections by MFIs in Andhra Pradesh had deteriorated considerably and there were some incipient signs of contagion spreading to other States. To deal with the problem, the RBI has temporarily relaxed provisioning norms to enable banks to continue lending to the cash-strapped MFIs. Banks can now restructure loans extended to MFIs even if they are not fully secured; bank loans to MFIs were mostly unsecured but to avail of the regulatory asset classification benefits under the present restructuring guidelines of the RBI, the accounts had to be fully secured. As a special case, banks need not for now classify such loans as non-performing assets (NPAs).

The RBI also constituted a committee, headed by Y H Malegam, to look into issues facing the microfinance sector in order to bring about long term and structural changes in the functioning of MFIs. According to the committee report the players in the Microfinance sector fall under three main groups: The (Self help Group) SHG-Bank linkage model (pioneered by NABARD) accounting for about 58% of the outstanding loan portfolio; Non-Banking Finance Companies (NBFCs) accounting for about 34% of the outstanding loan portfolio, which encourage villagers to form Joint Liability Groups (JLG) and give loans that are jointly and severally guaranteed by the other members of the group, and Others including trusts, societies, etc, accounting for the balance 8% of the outstanding loan portfolio. All NBFCs are currently regulated by RBI (under Chapters III-B, III-C and V of the Reserve Bank of India Act). There is, however, no separate category created for NBFCs operating in the Microfinance sector, which is required as the borrowers in the microfinance sector represent a particularly vulnerable section of society lacking individual bargaining power, financial literacy and the ability to absorb external shocks The need for regulation is also strengthened because over 75% of the finance obtained by NBFCs operating in this sector is provided by banks and financial institutions including SIDBI. As at 31st March 2010, the aggregate amount outstanding in respect of loans granted by banks and SIDBI to NBFCs operating in the Microfinance sector amounted to Rs.13,800 crores. In addition, banks were holding securitized paper issued by NBFCs for an amount of Rs.4200 crores. Banks and FIs (including SIDBI) also had made investments in the equity of such NBFCs.

Many NBFCs in this sector started off as non-profit entities providing micro-credit and other services to the poor however, as they found themselves unable to raise adequate resources for a rapid growth of the activity, they converted themselves into for-profit NBFCs. Others entered the field directly as for-profit NBFCs seeing this as a viable business proposition. Significant amounts of private equity funds have consequently been attracted to this sector. As there have been accusations of MFIs charging unreasonable fees and using loan sharks to collect outstanding payments, the Malegam panel has proposed a cap of 24% on the interest charged and an upper limit of 25,000 Rupees ($549; £344) on individual loans (as well as the aggregate value of all outstanding loans of an individual borrower). It has recommended an average ‘margin cap' of 10 per cent for MFIs having a loan portfolio of Rs.100 crore and of 12 per cent for smaller MFIs It also proposed a transparency in charges, with an MFI allowed to levy only three charges - processing fee, interest and insurance charge. Further, NBFCs operating in the Microfinance sector not only compete amongst themselves but also directly compete with the SHG-Bank Linkage Programme. The committee has made a number of recommendations to mitigate the problems of multiple-lending, over borrowing, ghost borrowers and coercive methods of recovery. These include: a borrower can be a member of only one self-help group or a joint liability group; not more than two MFIs can lend to a single borrower; there should be a minimum period of moratorium between the disbursement of loan and the commencement of recovery; the tenure of the loan must vary with its amount; a credit information bureau has to be established; the primary responsibility for avoidance of coercive methods of recovery must lie with the MFI and its management; and the RBI must prepare a draft customer protection code to be adopted by all MFIs. As there may be a need to give special facilities or dispensation to NBFCs operating in this sector, a separate category of NBFCs for microfinance institutions is suggested, defined as “A company (other than a company licensed under Section 25 of the Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf”. The committee also recommends that bank advances to MFIs shall continue to enjoy “priority sector lending” status. However, advances to MFIs which do not comply with the regulation should be denied “priority sector lending” status. While the committee guidlines are overall well balanced in favour of both borrower and lender, certain recommendations raise additional challenges in terms of both compliance and operations and may phase-out smaller MFIs. For example, the ascertaining of family income and that a lender borrows from not more than two sources would be very difficult in reality. For the borrowers, a Rs.25,000 limit may not be enough in certain circumstances to pull a family out of poverty and make the borrower credit worthy in future. Insistence on loans being made primarily for income-generating activities may, again defy the very purpose of microfinance. Currently an MFI being a NBFC is required to have a minimum capital of Rs.2 crores, the suggestion that for a NBFC MFI this should be increased to a minimum Net Worth of Rs.15 crores, if adopted would raise entry-barriers to the industry.

Tiding over some Crisis Induced Weaknesses

2010-11-12T21:35:00.000-08:00

Fiscal risks remain elevated in advanced economies where public debt ratios as percentage of GDP are still rising rapidly, the International Monetary Fund (IMF) said in its latest edition of the Fiscal Monitor. Market views on fiscal developments are being reflected in bond yields and spreads becoming more polarized; yields have declined in countries regarded as safe, or at least safer, havens, while they have increased (and spreads have widened) for a few countries that are considered to be more at risk. Developments in Europe also seem to have favored a portfolio reallocation toward emerging markets, particularly emerging Asia. EMEs are seeing historically low spreads, reflecting large capital inflows spurred by their relatively strong growth and fiscal positions and prospects. An analysis of the determinants of polarization of some specific type of spreads reveals that, although cross-country variation in spreads reflects country-specific fiscal fundamentals and other variables affecting solvency (growth prospects and banks balance sheet fragilities), global variables—such as risk aversion and global growth—have recently played an important role.

The Monitor, drawing on projections from the October 2010 World Economic Outlook (WEO), shows that: global fiscal deficit is projected to fall from 6.75 percent of GDP in 2009 to 6 percent this year, in line with earlier projections. Deficit declines are mostly due to improved economic conditions and to lower support to the financial sector. Further, in 2011, the global fiscal deficit will fall further, to about 5 percent of GDP. About 90 percent of countries are projected to record smaller deficits in 2011 (relative to 2010), with most of the deficit decline due to policy tightening. The advanced G-20 economies on average plan to improve their CAB by 1.25 percentage point annually during 2011–13, including through the unwinding of the 2009–10 stimulus. In the United States, the largest adjustment is expected to come in 2012. Fiscal consolidation plans of most economies are tilted toward expenditure cuts and spending cuts are more tilted toward the wage bill, size of civil service, and social transfers rather than public investment. On the revenue side, measures affecting direct taxation dominate, which may raise concerns for the impact on growth. Of the announced and already implemented revenue measures, personal income tax , corporate income tax, and social security contributions accounted for nearly half of all revenue measures, while increases in the value-added tax (VAT) (ranging from 1 to 4 percentage points in Europe) and excise taxes represent some additional revenue generating measures.

India

India faces a dilemma similar to some other emerging markets; on the one hand the return to fiscal sustainablility has led to cut back in government expenditures and stimuli once growth revived, on the other hand private sector demand is being pushed back through rate hikes in the fear of stoking inflation. The Reserve Bank of India recently increased both its policy rates by a quarter of a percentage point; the rate at which the central bank lends to banks was raised to 6.25%, and the rate at which it borrows from them was increased to 5.25%. The tightening was India’s sixth this year, mainly driven by the need to tame inflationary expectations. However, food price inflation the main cause for concern seems very unlikely to soften significantly as the spectre of inflation looms larger over global agricultural markets after the US slashed key crop forecasts and warned of shortfalls in grains, adding to problems raised by a massive drought in Russia; the UN’s Food and Agriculture Organisation noted the inevitable tightening of the overall food price situation as we go into 2011. On the other hand, successive rate hikes By RBI is now accompanied by a certain renewed sluggishness in industrial growth borne out by the vertiginous fall in IIP number to 5.6% (6.9 revised) in August and 4.4% in September predicted by the 18 month low September growth figures of 2.5% for the 6 infrastructure industries which account for over a quarter of IIP.

Despite being delinked with the global financial sector, the Indian banking sector has witnessed a relatively sluggish performance in the year 2009-10 with some emerging concerns with respect to asset quality and slow deposit growth. Bank deposits, which constituted around 78 per cent of the total liabilities of SCBs, registered a decelerated growth for the third consecutive year since 2007- 08. One of the factors responsible for a decline in the deposits growth in 2009-10 was the prevalence of low interest rates for a major part of the year. The other emerging concern was with respect to asset quality of banks. The gross Non-Performing Assets (NPAs) ratio showed an increase from 2.25 per cent in 2008-09 to 2.39 per cent in 2009-10. Moreover, there was an increase in the proportion of doubtful and loss assets in 2009-10. The increase in gross NPA ratio coupled with a decline in the (outstanding) provisions to gross NPA ratio in 2009-10 at the aggregate level, underlined the need for further strengthening of provisions by banks, though, notwithstanding the weakening asset quality, the Capital to Risk-Weighted Assets Ratio (CRAR) of Indian banks remained strong at 14.5 per cent, way above the regulatory minimum of 9 per cent after migration to the Basel II framework, providing banks with adequate cushion for emerging losses. In 2009-10, the profitability of Indian banks captured by the Return on Assets (RoA) was a notch lower at 1.05 per cent than 1.13 per cent during the previous year. Low levels of financial penetration and inclusion in the global comparison continued to be an area of concern for the Indian banking sector. However, data on sectoral deployment of gross bank credit does show significant improvement in credit flow to industry, services and personal loans during the current financial year, while credit to agriculture has declined further. Overall flow of resources from the financial sector to the commercial sector increased significantly in the first half of 2010-11 relative to the flows in the corresponding period of last year, though domestic non-bank sources of funds have declined.

Thus looking ahead, given the unstable global scenario, as the balancing act continues considerable volatility in all indicators of the Indian economy could be expected for some time to come. Track the global and Indian economy with our monthly statistical bulletin E-UpDates with monthly as well as daily data on the Indian and global economy for over 20 indicators.

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India Part of the IMF’s Surveillance for the World’s Top 25 Financial Sectors

2010-09-28T04:52:00.000-07:00

According to the IMF Executive Board the recent crisis has made clear the need for mandatory and regular assessments of financial stability for countries with large and interconnected financial systems. Economies with financial sectors that have the greatest impact on global financial stability are now required to undergo in-depth reviews of their financial health by the International Monetary Fund every five years. All of the IMF’s 187 member countries are already required to undergo an annual economic health check-up, known as an Article IV consultation. In addition, Financial Sector Assessment Program (FSAP) offers the opportunity to all member countries to undergo, on a voluntary basis, a comprehensive financial sector assessment. The financial stability component of the voluntary FSAP will now be a mandatory part of the IMF’s surveillance for the world’s top 25 financial sectors. Under the Fund’s existing legal framework, it is open to the Fund to require members with systemically important financial sectors to engage in regular mandatory financial stability assessments under Article IV while not requiring such assessments of other members. The mandatory financial stability assessments will comprise three elements: 1) An evaluation of the source, probability, and potential impact of the main risks to macro-financial stability in the near term, based on an analysis of the structure and soundness of the financial system and its interlinkages with the rest of the economy; 2) An assessment of each countries’ financial stability policy framework, involving an evaluation of the effectiveness of financial sector supervision against international standards; and 3) An assessment of the authorities’ capacity to manage and resolve a financial crisis should the risks materialize, looking at the country’s liquidity management framework, financial safety nets, crisis preparedness and crisis resolution frameworks.

For defining systemic importance for this exercise a conceptual framework was developed by the IMF, BIS, and FSB. This framework approaches systemic importance from both a domestic and a global point of view. It identifies the following three key concepts: (i) size, i.e., the volume of financial services provided by an individual financial institution or market; (ii) interconnectedness, i.e., the extent of linkages with other financial institutions or markets; and (iii) substitutability, i.e., the extent to which other institutions or markets can provide the same services in the event of the failure of part of the system. The methodology for identifying jurisdictions with systemically important financial sectors is a three-stage process that uses available financial data for the entire Fund membership. The results identify 25 jurisdictions with the most systemically important financial sectors, which cover almost 90 percent of the global financial system and represent almost 80 percent of global economic output. At present the countries, in order of ranking, are: United Kingdom, Germany, United States, France, Japan, Italy, Netherlands, Spain, Canada, Switzerland, China, Belgium, Australia, India, Ireland, Hong Kong, Brazil, Russian Federation, Korea, Austria, Luxembourg, Sweden, Singapore, Turkey and Mexico.

Cause Enough for RBI to Pause?

2010-09-04T10:38:00.000-07:00

RBI’s tightening cycle was almost unanimously presumed to continue in its September policy review, however, the global economic scenario has clouded considerably recently and though the Indian economy seems to be steaming on there are a few warning signs which ought to be heeded before it is too late.

Growth in the world's largest economy decelerated to a pace of 1.6 percent, signaling a more pronounced slowdown in the recovery from recession. July consumer spending a key driver of US economic growth, usually accounting for two-thirds of output rose 0.4% and incomes rose a mere 0.2%, with spending outpacing income. The US Unemployment rate for August came in higher as forecasted at 9.6%, while the Change in Nonfarm Payrolls for the same period showed a better than predicted shed of 54 thousand jobs. However, the Change in Manufacturing Payrolls showed a shed of 27 thousand jobs, which is actually worse than the predicted outcome, and also Change in Private Payrolls showed that jobs added were lower than expected. Europe looked better; economic confidence in the 16 countries that use the euro rose to its highest level in nearly two-and-a-half years during August, as unemployment concerns eased somewhat. The UK economy expanded at 1.6% year-on-year, faster than previously estimated in the second quarter in the biggest growth spurt since 2001 as companies rebuilt stocks and construction work surged.

Japan's government and the central bank had to throw the economy a double lifeline; accompanied by an unanimous vote to keep its key interest rate at a 0.1 percent the central bank unveiled a new six-month low-interest loan program to financial institutions to boost liquidity, combined with an existing three-month funds-supplying operation worth 20 trillion yen ($236 billion) so that banks would have access to a total of 30 trillion yen ($355 billion).

India's economy grew 8.8 percent in the first quarter of the current fiscal, its best performance since 2007, led by a 12.4 percent year-on-year surge in manufacturing, a 9.7 percent leap in services and an 8.9 percent jump in construction and was also boosted by agricultural output expansion of 2.8 percent. Yet many economists suggest that the central bank, which has hiked rates four times since the start of the year to curb inflation, should pause its monetary tightening — the most aggressive in the Asia-Pacific region — in the face of the shaky global outlook. If that is not cause enough RBI should possibly heed the warning signals emitted from the slowdown in domestic investment; not only has manufacturing growth slowed from 16.3% in the previous quarter to 12.4%, essential supplies and construction outputs have also shrunk as compared to the previous quarter, while services growth in important sectors have not really picked up. More concerning is the fact that gross fixed capital formation has decelerated compared to the last 2 quarters at a time that it ought to be rising with a need for vast infrastructure spending both for physical and human resources development. Should inflation control measures delinked from monetary policy and targeted at select necessary commodities now be evaluated instead?

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RBI Move Caught between Hawks and Doves

2010-08-02T06:22:00.000-07:00

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In line with policy normalization to pre-crisis levels and to fight continuing inflation pressures the Reserve Bank of India was expected to raise policy rates yet again in its First quarter Review of Monetary policy for fiscal 2010-11, however, the exact amount of tightening seems to have displeased both the Hawks and Doves. The RBI’s July review of monetary policy had three focal points — the central bank raised short term lending or the repo rate by 0.25 percentage points to 5.75 per cent; the short-term borrowing or reverse repo rate has been hiked by 0.50 percentage point to 4.50 per cent; and the cash reserve ratio or CRR and bank rate have been kept unchanged at 6.0 per cent. RBI has apprehended inflation and growth concerns and tried to balance them out and raised the repo rate to signal its hawkish bias to tame inflationary expectations, while it switches to a liquidity injection mode whenever there is a pressure on overnight rates. The asymmetric hikes in rates which leads to a narrowing of the corridor between the borrowing and lending rates is to signal the central bank’s desire to cut down volatility in short-term rates. The CRR has understandably been kept unchanged as bank deposits have not grown sufficiently in the low interest rate scenario and thus it may not be sensible to further reduce the lending ability of banks. The increase in bank deposit rates is expected to raise banks’ deposit accumulation and help to transmit monetary policy with a lag when they start raising lending rates thus moderating fund flows to particular sectors which are in danger of over-heating.

However, the Hawks blamed RBI for not doing enough to tackle inflation — especially given the fact that growth expectations are now higher along with emergence of clear demand side pressures on inflation — a 25 bps hike was clearly thought to be inadequate. Combined with an existing scenario of negative real interest rates RBI’s stance was not considered to be at par with a central bank dedicated to maintaining an inflation target. Doves on the other hand feel that given the uncertainty of global economic recovery and the infrastructure bottlenecks faced by the Indian economy, the cumulative 50 bps repo rate hike in the month was a bit steep and could destabilse the growth momentum, an apprehension not entirely unjustified, given that May IIP growth was significantly lower than preceding months, followed by June Core sector figures which were also lowest in a number of months. Not to forget the main supply side pressures on inflation created by tremendous amount of infrastructure investments still needed to strengthen agriculture and distribution mechanisms within the country. In fact the RBI brought a deluge on to itself as it said that the rains would impact inflation; however, we forget two things— it is not entirely the central bank’s fault that we still do not have enough infrastructure in place so as to not allow Rain Gods to set our inflation trajectory and also international commodity (say fuel) prices are still very much dependent on the amount of snowfall the West receives.

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Current Account Transactions – Further Liberalisation

2010-05-17T10:18:00.001-07:00

In terms of (Rule 4) of the Foreign Exchange Management (Current Account Transactions) Rules 2000, prior approval of the Ministry of Commerce and Industry, Government of India, is required for drawing foreign exchange for remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lump-sum payment exceeds USD 2 million [item 8 of Schedule II to the Foreign Exchange Management (Current Account Transactions) Rules, 2000].The Government of India reviewed the extant policy with regard to liberalization of foreign technology agreement and decided to omit item number 8. It was decided to permit, with immediate effect, payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/brand name on the automatic route without the approval of Ministry of Commerce and Industry, Government of India. These new rules will be called the Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2010, and shall be deemed to have come into force with effect from the 16th of December, 2009. The Ministry of Commerce and Industry (Government of India) issued a press release on 17 December, 2009 stating that it has removed certain requirements to obtain prior government approval for the transfer of technology into India with immediate effect.

Under the earlier policy, government approvals were required for foreign technology transfers into India involving lump-sum payments of over US$2 million, and payments of royalty of over 5% on domestic sales and 8% on exports. Even if no technology transfer was involved and the foreign collaboration was limited to licensing of trade marks, prior government approvals were required if the royalty payments were over the prescribed limits of up to 2% for exports and 1% for domestic sales. In December 2009 a new policy removed any such restrictions, however, all such payments were subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000 (FEMA Rules), which has now been amended further easing foreign collaborations in the field of technology.

RBI Balances Inflation and Financing Needs for Sustained Growth

2010-04-22T22:27:00.000-07:00

The Reserve Bank of India tightened monetary policy another notch in its Annual Policy Statement for the new fiscal , hiking the short-term indicative borrowing and lending rates — repo and reverse repo — and the mandatory Cash Reserve Ratio (CRR) of banks by 25 basis points each. As a result of the increase in the CRR, about Rs.12,500 crore of excess liquidity will be absorbed from the system. This move was expected given the high inflation numbers which are now not solely supply driven — with inflation at 9.90% in March and spreading from food prices to manufactured goods. The tightening builds on a surprise inter-meeting rate hike in March. While, not ruling out mid-cycle action, the RBI referred to the fact that growth is coming from sectors which are interest-rate sensitive, and the need to step cautiously so as not to derail growth at this juncture. Lenders have indicated that this move is unlikely to result in an immediate increase in cost of borrowing even though the interest rate bias is clear. Real interest rates are still mostly negative.

The monetary policy stance was formulated in the backdrop of the need to continue steadily with tightening, while attempting to ensure, among other things, minimal disruptions in fund flows, both to the government’s already stretched market borrowing programme and to private corporations, and also to ensure a pick up in private consumption. RBI also mentioned measures designed to deepen financial markets and augment policy transmission channels in future which should gain clarity by its first policy review in July.

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Inflation Drives Exit-from-Stimulus Strategies

2010-03-22T04:28:00.000-07:00

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The US FOMC continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period and will maintain the target range for the federal funds rate at 0 to 1/4 percent. However, in light of improved functioning of financial markets, the Fed has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral. To provide support to mortgage lending and housing markets the Fed has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are likely to be executed by the end of this month.

ECB decided to leave the key interest rates unchanged as Euro zone inflation in February is at 0.9% and monetary analysis confirms the assessment of low inflationary pressures over the medium term, with money and credit growth remaining weak. But ECB announced the gradual phasing-out of our non-standard operational measures which includes return to variable rate tender procedures in the regular three-month longer-term refinancing operations (LTROs), starting with the operation to be allotted on 28 April 2010, further allotment amounts in these operations will be set with the aim of ensuring smooth conditions in money markets and avoiding any significant spreads between bid rates and the prevailing MRO (main refinancing operations) rate.

Policy makers in UK on the other hand had to acknowledge emerging evidence on the upside risks to inflation, though at the moment Bank Rate would be maintained at 0.5% despite the fact that UK inflation has increased to 3.5%, above the government's target. BoE would also maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion as lending growth to households and businesses had remained weak, reflecting both demand and supply factors and was likely to remain constrained until the banking sector had completed the process of balance sheet restructuring and the refinancing of its own funding maturing over the coming years.

RBI of course decided to act prior to its annual policy review and has increased its key rates by 25 bps citing that containing overall inflation and anchoring inflation expectations have become imperative as inflationary pressures have intensified beyond RBI’s baseline projection and heighten the risks of supply-side pressures translating into a generalised inflationary process. After revision, the reverse repo rate — the rate of interest that the RBI offers banks when they leave their funds with the central bank — is 3.50%, nearly 42% lower than the pre-crisis level of 6%. The repo rate, at which banks can borrow from the central bank, is now 5%, 44% lower than the pre-crisis peak of 9% leaving enough scope for further hawkish measures probably again before its annual review, as headline WPI inflation which on a year-on-year basis stands at 9.9 per cent in February is expected to reach double digits in March 2010.

Focal Points of Indian Union Budget 2010-11

2010-03-03T21:54:00.000-08:00

India's recent GDP numbers show that the economy grew 6 percent in the December quarter, as farm output fell 2.8 percent after a drought. The core sector, comprising six key infrastructure industries, grew 9.4 per cent in January 2010, compared with 2.2 per cent in January 2009 and pushes up hopes of a robust rcovery. The prime concern remains inflationary pressures which have built up by 8.9% (WPI based) in this fiscal so far, as compared to 1.51% in the last fiscal, pushed by food price inflation which has built up by a massive 14.7% during thi sfiscal compared to a 5.4% build up in the last fiscal. The Union Budget for the FY2010-11 addressed concerns on fiscal discipline with a plan to reduce the fiscal deficit to 5.5 percent of GDP in the new FY from 6.9 percent this fiscal, and further declines in coming years. Additional borrowing of 1.3% was proposed and given that the fiscal stimulus withdrawal was not aggressive so as to not choke wavering recovery, the case for policy tightening by RBI seems to be stronger. The budget lacked any direct measures to curb rising food prices, further the duty rollback on petroleum could contribute somewhat to inflationary pressures, however, reigning in of the fiscal deficit despite difficult circumstances should help cool long term inflation expectations.

Infrastructure, agriculture and social sector have been the key focus areas of budget 2010-11. From the infrastructure sector perspective, the positives are increased allocation for infrastructure by providing 46% of the total plan allocations, especially with respect to roads and the power sector and clean energy initiatives. The proposed tax relief for investment in long-term infrastructure bonds will further boost investment in infrastructure, while increased refinancing through IIFCL would help bank lending to infrastructure. Bank recapitalisation plans and the farm loan waiver are expected to benefit the banking sector. Much needed measures to boost farm spending and research and lift agriculture sector growth to 4 percent in the medium term were taken. With the key focus on inclusive growth social sector by allocation is around 37% of the total plan outlay, while urban development allocation has been increased by more than 75%.The budget has extended the interest subvention on pre-shipment credit for key export-oriented sectors and similarly extended the housing-loan interest subsidy scheme for another year, thus indicating that the fiscal stimulus would continue to sensitive sectors affected by the global slowdown. The expansion of direct personal tax slabs would help stabilise the nascent demand recovery.

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Into 2010 —Views on Sustainability of Recovery

2010-01-20T20:39:00.000-08:00

Into the new decade beginning 2010 much of the Global economy is technically out of recession, thanks to the unprecedented synchronized monetary and fiscal stimulus provided by governments across the globe, even though major economic indicators continue to see-saw. The combination of improvement in the functioning of financial markets, higher prices for risky assets and the recent slower pace of tightening bank lending standards are expected to increase the chances for sustainable recovery according to the Global Economic Forum of Morgan Stanley. A slower pace of inventory liquidation and a gradual shift to inventory accumulation should add to growth. Past aggressive payroll cuts may now give rise to an increase in demand for labour and help to strengthen recovery. GEF points out that inflation risk will be a crucial factor for markets henceforth; as (particularly due to rising commodity price inflation) market-based inflation expectations are gradually rising. The end of easing and beginning of exit can be expected to cause wobbles in financial markets pushing inflation premia and thus bond yields significantly higher. The aggressive provision of stimulus has also theoretically led to significant increase in sovereign fiscal balances and default risks, which also pushes up bond yields.
Another threat to the nascent recovery in the form of existing global imbalances of distortionary /risky nature has been discussed in an IMF policy note, which points out that crisis induced changes in saving and investment patterns across the world have narrowed previously rising imbalances considerably. However, policy measures are required to correct for distortionary effects of — large current account deficit in the US, high oil prices and the large savings of oil exporters, high and rising saving rates in China, the investment boom driven by asset prices in peripheral Europe, the collapse in investment in emerging Asia (excluding China) and in Japan. An increase private and public US saving, an increase in social insurance, strengthening corporate governance, and implementation of reforms to increase access to credit for households and SMEs in China, a move from export-led towards more domestic-demand led growth in a number of emerging market countries, room for higher domestic demand and more spending on social infrastructure needs in some oil-exporting countries would help global rebalancing and ensure sustainability of recovery.
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Happy New Year 2010

2010-01-03T05:54:00.000-08:00

The SurgeRS (Surge Research Support) wishes all friends and visitors a very Happy New Year.

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FDI Focus

2009-12-11T09:46:00.000-08:00

The OECD’s Investment Policy Review of India, 2009 lauds India for the policies to encourage investment as part of market-oriented reforms since 1991. However, according to OECD further reforms are needed as India’s policy framework for FDI still remains restrictive compared with most OECD countries and particularly as India’s investment needs remain massive, with poor infrastructure holding back improvements in both living conditions and productivity. In its first investment policy review of India, the group of 30 developed countries, OECD has recommended further easing of restrictions on foreign investment flows to India, in areas such as banking, insurance and retail distribution where productivity levels are low and greater foreign investment could help raise incomes.

However, one cannot help but question whether it is the opening up of these particular sectors, or a policy thrust towards directing FDI to focus areas, which is the need of the hour, in order to actually promote growth with equity. In retail, the OECD has pointed out that local laws are aimed at protecting small shops and has argued in favour of opening up the sector, but given India’s socio-economic backdrop, it would only probably lead to more of inequality with employment focused more on the educated youth, for whom a lot of opportunities have already been opened up. Looking at the cumulative FDI flows between Apr-’00 to Sep-’09, in different sectors we see that the services sector already accounts for about a fourth of total FDI(21.94%). Probably the government should now concentrate more on designing policies to attract industry-specific FDI to select focus areas in the manufacturing sector, which would generate higher number of jobs while improving technology and technical skills and also on the education (now accounting for 0.35%) and health (0.67%) sectors, where long term developmental benefits would be significant. Drawing higher FDI to industries like food processing (now at 0.90%) for example could also bring greater benefits to the agricultural sector, whose growth rate has been suffering in recent times.

On the hand, in the OECD report more attention-worthy is the review’s stress on the need to expedite the judicial process in the country pointing out that for investors, significant delays in justice can mean bankruptcy and strengthening the capacity of the judicial system could make a big difference to investment.

The report has rightly pointed out that while the central government has reduced the number of approvals needed for new investment, there remains a need to streamline administrative procedures at the state level.

The OECD has also proposed to undertake joint future work on green growth, promoting infrastructure development through public-private partnerships, developing nationally consistent regional FDI statistics and launching a review of the regulatory policies of India, all of which should be extremely beneficial for the economy.

A Check on Indian & Global Recovery

2009-11-22T10:03:00.000-08:00

India's industrial output jumped by a higher-than-forecast 9.1% in September from a year earlier with 9.3% growth in manufacturing output. Production of consumer durables, that was particularly hard hit as India suffered the fallout from the international slump, grew by 22.2 percent in September underpinned by robust consumer spending fuelling hopes that Asia's third-largest economy is firmly on the up-trend. Emerging market leader China recorded industrial production expansion of 16.1 percent in October. US industrial production figures for October showed a mixed picture; manufacturing output eased after several strong months as auto production fell 2.0 percent, reflecting some of the volatility from the end of a government incentive program. With the U.S. unemployment rate at 10.2 percent, U.S administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction. In fact, the US president has again reiterated the need to contain rising U.S. deficits, saying that if government debt were to pile up too much, it could lead to a double-dip recession — two issues we have written about in two previous posts to this blog.

India’s Merchandise shipments dropped 11.4 percent from a year earlier to $12.5 billion after sliding 13.8 percent in September. September's figures for several Asian economies including China showed weakness in outbound shipments. In India the continued decline in heavy-weight sectors like engineering goods or readymade garments is a cause for concern, as much of the boost has come from high value sectors like pharma and electronics and also from a diversification to new markets. The improvements in recent months, compared with earlier slides like a 33-39% drop between March-May this year, suggests that the global demand slump may finally be easing. Indeed, U.S. imports rose by $9.3 billion in September to $168.4 billion; the 5.8% increase from August was the largest one-month percentage gain in 16 years and is a sign of improvement in US domestic demand. In UK too, overall imports rose by 7.5%, due to an increase in auto exports of 29.2% over the month. In the Euro zone, Germany’s economic recovery accelerated in the third quarter as government stimulus programs fueled company spending and a rebound in global trade boosted exports, helping the 16-nation euro area return to growth in the third quarter. German imports also rose strongly in the quarter. The Euro zone's main consumption-driven economy, France, is growing but at a slower-than-expected pace. Japan’s Q3 growth at 1.2% is almost double that of market expectations, however, deflation is back to haunt the economy as the domestic demand deflator fell by 2.6% recording its steepest fall in over half a century not boding well for global economic recovery.

FII flows of Rs 73,440 crore so far this year in India’s bourses is the highest ever investment made in rupee terms in a single year. Measured at about $15 billion, flows are likely to exceed record levels of close to $17.65 billion seen in 2007. This is perpetuated by the fact that FIIs are able to borrow money at near zero per cent interest rates in the developed markets and park such capital into Indian equities made attractive by the country’s growth potential. Such heavy inflows has become a concern for policy makers and exporters alike and a Brazil style tax on short-term cross border flows has been suggested to discourage USD carry trades. However, the Finance Ministry is not considering any immediate curbs on foreign portfolio flows, probably as the stock market recovery is nascent and domestic investors may not have enough drive to keep the bullish sentiments going in the secondary capital market. (More on this issue in our next post.)

India's annual food inflation, which has been the key inflation driver, jumped to 13.68 percent in the last week of October and further to 14.55% in the first week of November; as we have detailed in the previous post to the blog, the central bank has already turned somewhat hawkish to control inflationary pressures which are mounting (Click here to see summary of latest RBI policy). The government may set out the time frame for the withdrawal of stimulus measures in the Union Budget presented before the next fiscal, if global recovery remains on track. The interest rate tightening cycle could begin if the WPI based inflation rate, which was at 1.3% for October, crosses 5%.

As countries around the world recover from the crisis, unanswered questions about the necessary restructuring of the global economy require urgent attention, according to leaders from business, academia and society. Speakers at the World Economic Forum's Summit on the Global Agenda expressed the view that the crisis has focused the minds of governments, particularly the G20, on what you need to do to rebalance globalization; it means rebuilding economies, balancing exports with domestic demand and investing in jobs and social protection. Some also opined that, while global efforts to address the crisis have stopped the downward spiral of the broad economy and sparked renewed confidence in the financial markets, there are acute worries that the momentum for reform might be ebbing.

RBI commences the exit process

2009-10-29T21:53:00.000-07:00

The central bank of Asia's third-largest economy, the Reserve Bank of India, has begun the unwinding of its loose Monetary Policy; though it has kept key rates unchanged the RBI has signaled the end of fiscal stimulus by withdrawing some of the emergency liquidity support measures that were implemented during the peak crisis period. To read a summary of the Macro-economic review and policy measures taken please visit this link.

The Indian stock markets have reacted violently as the feeling is that tightening bias comes a tad earlier than expected. However, RBI, analysts and bankers have expressed the view that the changes implemented so far will not have any impact as much of it constitutes reversals of measures no longer being used. The SLR change really will have no real impact on the economy as the scheduled commercial banks are already in maintaining a SLR of 27.6 per cent, so there is no immediate impact on liquidity. Discontinuing the support to Mutual funds could have an impact on the Net Asset Values of the funds, if they face large scale redemptions; to prevent this RBI has allowed MFs to borrow from banks to meet the needs for redemption. Withdrawal of two repo facilities, one for banks and one for the funding needs of mutual funds, non-bank finance companies and housing finance companies are unlikely to affect liquidity levels as both these facilities had not been used for more than a couple of months. Lowering the limit of export credit refinance facility to 15 percent from 50 percent, and discontinuation of a forex swap facility for banks, is unlikely to have much impact on market conditions as a review had found use of the facilities was low.

Central banks in all the major developed economies, barring Australia, are continuing with easy monetary policy and have held policy rates steady in recent months. They have also continued with measures to provide liquidity and other support to alleviate stress in the financial markets following the crisis. In the current cycle, the Reserve Bank of Australia has been the first G-20 central bank to raise its policy rate (Cash Rate) by 25 basis points to 3.25 per cent on October 6 on the back of diminished risk of serious economic contraction. The Reserve Bank of New Zealand has withdrawn some temporary emergency liquidity facilities put in place during the financial crisis of 2008. China has reiterated its commitment to proactive financial policies and moderately loose monetary policies amid market speculation that it might be preparing an exit strategy. Despite the fact that the country's economic growth is likely to speed up in the fourth quarter (from an average of 7.7 per cent in the last three quarters), the Chinese government has said that it will stay on course of its fiscal stimulus spending.

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Recovery and Government Debt

2009-10-06T00:12:00.000-07:00

US
The US Federal Reserve has said economic activity is picking up but it expects to keep interest rates close to zero for an extended time. US interest rates were cut to the current level of between 0% and 0.25% in December last year, and have been left unchanged. The 0.7% fall in second-quarter US GDP was better than market expectations and an improvement from the first quarter's 6.4% contraction; importantly, business investment which had slumped 39.2% in the first quarter, fell at a 9.6% rate in the second quarter. Conditions in financial markets have improved further, and activity in the housing sector has increased, though household spending remains constrained by ongoing job losses. The Fed also pledged to continue a program with $1.45 trillion to help keep credit flowing to the housing market and other segments of the economy by purchasing mortgage securities and debt. Meanwhile, US jobless rate hit 26-year high of 9.8%, underscoring the fragility of the economy's recovery from its worst recession in 70 years as businesses remain cautious about the future. The IMF said it now expects the US economy to grow 1.5% in 2010, up from its July forecast for 0.8% growth, however, it warned that the financial crisis had contributed to a high and rising debt trajectory that could become unsustainable without significant medium-term measures. The IMF estimated that US debt would reach almost 110% of gross domestic product by 2014, and called it a worrisome deterioration given looming healthcare and pension pressures. The US budget deficit topped $1 trillion for the first nine months of the fiscal year that began in October and totalled $1.1 trillion, as individual and corporate tax receipts are sliding because the jobless rate continues to rise and companies have yet to see a sustained increase in demand; the shortfall is also widening as the government ramps up spending. For the fiscal year that ends in September, the Office of Management and Budget has forecast the deficit to reach a record $1.841 trillion, more than four times the previous fiscal year’s $459 billion shortfall.

India
The Reserve Bank of India feels that choices with regards to policy changes like revision of monetary policy are becoming increasingly complex for India's central bank as signs of economic recovery continue to be tentative while inflation is firming up. Several indicators are pointing to an economic recovery, such as better-than-expected economic growth numbers, improvement in industrial output during April-July and higher relative growth in infrastructure industry or core sector performance, revival of capital flows and strong recovery of the stock markets. Indeed, the bellwether Sensex broke the 17,000-mark this week — a level first reached two years ago in September 2007 and last seen 16 months ago in May last year — on sustained capital inflows. Yet, there are downside risks on account of the impact of poor monsoons on agriculture, slowdown in exports and sluggishness of global recovery. On the other hand, rising inflationary pressures could limit the scope for sustained growth supportive monetary policy stance; WPI-based inflation for mid-September rose to 0.83% from 0.37% in the previous week on costlier food items.

The country’s fiscal deficit—the gap between receipts and spending that is usually financed through borrowings—rose 35% in the first five months of the fiscal compared to the same period a year ago as the government continued with tax cuts and higher public spending to boost the economy. Fiscal deficit in the April-September period stood at Rs 1,82,290 crore, which is 45.5% of the budget estimate for the current fiscal. In the same period a year ago, it had scaled 87% of the budget estimate and the government had to revise the annual fiscal deficit from a target of 2.5% to 6% as the economic downturn prompted it to step up spending and cut taxes. The government had set an annual gross borrowing target of Rs.4.51 trillion for 2009-10 (April-March), and has already sold Rs 2.95 trillion of bonds until September; it will sell bonds totalling Rs.1.23 trillion ($25.6 billion) between October and March as part of its borrowing schedule. Expenditure curbs are being put in place so that the fiscal deficit target of 6.8% of GDP would not be exceeded. For the first time, RBI is offering more flexibility to state governments to rein in their market borrowing costs and has allowed West Bengal to borrow funds by selling state government securities with a put option after four years, which means investors can redeem these securities prematurely after completion of the fourth year of maturity; states, typically, borrow from the market by selling 10-year securities called State Development Loans (SDLs) through RBI s auction window.

Will it be ‘W’ ?

2009-09-13T03:08:00.000-07:00

A year has gone by since the collapse of US investment bank Lehman Brothers sent major shock waves across financial markets and eventually dragged the global economy into a severe synchronised recession. Signs that the global economic recovery is strengthening continue to emerge over the past few weeks, as increasingly more key indicators, such as business sentiment, trade, manufacturing and industrial production indices, are turning positive and more or less maintaining their uptrend from the trough, helped by enormous spending by governments over the globe. While there are risks associated with a prolonged expansionary monetary and fiscal stance – such as rising government debts, inflation, and the encouragement of new bubbles to develop in the stock and real estate markets – the consensus view is that unwinding the stimulus measures too soon could derail the global recovery process. This is particularly so as, amidst the recent optimism, warning bells are being sounded on the shape of the global economic recovery giving rise to concerns about a W-shaped recovery or a double-dip- recession. (A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession, when (GDP) growth slides back to negative after a quarter or two of positive growth.

India’s Recovery Wobbles?

RBI has warned that the Indian economy is unlikely to revert to its trend growth rate soon, as recession in advanced economies would eat into global growth and world trade. A drought like situation through most of the monsoon season has also led to concerns on the agricultural economy. Consumer spending on the other hand has been very positive, as indicated by the double digit growth of consumer durables in the IIP numbers for July. Easier availability of credit coupled with higher consumer confidence and the festive season did wonders for car sales in August; while market leader Maruti Suzuki posted a 42 per cent growth, Mahindra & Mahindra, showed a 42 per cent rise in sales of its multi-utility vehicle range, while Hyundai Motor India and Tata Motors showed 11 per cent increase over the same month last year.

India, who had to resort to IMF loans on a few occasions till the early nineties, will now take part in a global effort to make resources available to the International Monetary Fund (IMF) for lending to countries in need. India will invest up to $10 billion of its reserves in Notes issued by the IMF; such investments would be treated as international reserves.

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Indian Foreign Trade Policy (FTP 2009-14)

2009-09-04T00:22:00.000-07:00

In the last five years India’s exports witnessed robust growth to reach a level of US$ 168 billion in 2008-09 from US$ 63 billion in 2003-04. India’s share of global merchandise trade was 0.83% in 2003; it rose to 1.45% in 2008 as per WTO estimates. India’s share of global commercial services export was 1.4% in 2003; it rose to 2.8% in 2008. India’s total share in goods and services trade was 0.92% in 2003; it increased to 1.64% in 2008. On the employment front, studies have suggested that nearly 14 million jobs were created directly or indirectly as a result of augmented exports in the last five years.
As the export sector has been a major casualty in this downturn the Indian Government has set in motion strategies and policy measures which will catalyse the growth of exports. The short term objective of the Foreign Trade Policy (2009-14) is to arrest and reverse the declining trend of exports and to provide additional support especially to those sectors which have been hit badly by recession in the developed world.

The Policy Objectives are as follows:

a) Achieving an annual export growth of 15% with an annual export target of US$ 200 billion by March 2011.
b) In the remaining three years of this Foreign Trade Policy i.e. upto 2014, the country should be able to come back on the high export growth path of around 25% per annum.
c) By 2014, the policy aims to double India’s exports of goods and services.
d) The long term policy objective for the Government is to double India’s share in global trade by 2020.

HIGHLIGHTS OF FOREIGN TRADE POLICY 2009-2014

Higher Support for Market and Product Diversification

1. Incentive schemes have been expanded by way of addition of new products and markets.
2. 26 new markets have been added under Focus Market Scheme. These include 16 new markets in Latin America and 10 in Asia-Oceania.
3. The incentive available under Focus Market Scheme (FMS) has been raised from 2.5% to 3%.
4. The incentive available under Focus Product Scheme (FPS) has been raised from 1.25% to 2%. 5. A large number of products from various sectors have been included for benefits under FPS.
6. Market Linked Focus Product Scheme (MLFPS) has been greatly expanded.
7. MLFPS benefits also extended for export to additional new markets for certain products.
8. A common simplified application form has been introduced for taking benefits under FPS, FMS, MLFPS and VKGUY.
9. Higher allocation for Market Development Assistance (MDA) and Market Access Initiative (MAI) schemes is being provided.

Technological Upgradation

1. To aid technological upgradation of our export sector, EPCG Scheme at Zero Duty has been introduced.

EPCG Scheme Relaxations

1. To increase the life of existing plant and machinery, export obligation on import of spares, moulds etc. under EPCG Scheme has been reduced to 50% of the normal specific export obligation.
2. Taking into account the decline in exports, the facility of Re-fixation of Annual Average Export Obligation for a particular financial year in which there is decline in exports from the country, has been extended for the 5 year Policy period 2009-14.

Stability/ continuity of the Foreign Trade Policy

1. To impart stability to the Policy regime, Duty Entitlement Passbook (DEPB) Scheme is extended beyond 31-12-2009 till 31.12.2010.
2. Interest subvention of 2% for pre-shipment credit for 7 specified sectors has been extended till 31.3.2010 in the Budget 2009-10.
3. Income Tax exemption to 100% EOUs and to STPI units under Section 10B and 10A of Income Tax Act, has been extended for the financial year 2010-11 in the Budget 2009-10.
4. The adjustment assistance scheme initiated in December, 2008 to provide enhanced ECGC cover at 95%, to the adversely affected sectors, is continued till March, 2010.

To read more about the FTP click: Foreign Trade Policy

India Budget 2009-10

2009-07-09T23:55:00.000-07:00

The Union Budget of India for fiscal year 2009-10 was presented on July 6th. The Budget aims to regain a growth momentum of 9% at the earliest and is aimed at inclusive growth for the economically weaker sections of the population. The Budget initiates the process of rationalizing the tax structure in the country and bringing it at par with international practices. It delays the date with fiscal prudence as the need of the hour is to boost domestic demand given the adversities in the external scenario which is expected to continue for some time more. Most of the policies are addressed to the twin benefits of boosting domestic demand and reducing inequality within the country’s population.

Following are the highlights of the pre-Budget Economic Survey 2008-09.
1. Economic growth decelerated in 2008-09 to 6.7 per cent. This represented a decline of 2.1 per cent from the average growth rate of 8.8 per cent in the previous five years (2003-04 to 2007-08).
2. Per capita GDP growth, a proxy for per capita income, which broadly reflects the improvement in the income of the average person, grew by an estimated 4.6 per cent in 2008-09.
3. Investment remained relatively buoyant, growing at a rate higher than that of GDP. The ratio of fixed investment to GDP consequently increased to 32.2 per cent of GDP in 2008-09 from 31.6 per cent in 2007-08, reflecting the resilience of Indian enterprise, in the face of a massive increase in global uncertainty and risk aversion and freezing of highly developed financial markets.
4. A decline in all major elements of private demand, including exports and consumption, necessitated a compensating widening of the fiscal deficit above the Fiscal Responsibility and Budget Management Act (FRBMA) target. The new, higher expenditures announced during the 2008-09 budget, had to be supplemented by an additional fiscal expansion, leading to an increase of 20.2 per cent in government final consumption expenditure during 2008-09. The effect of this and subsequent fiscal stimuli (e.g. excise and service tax reduction) on private demand would be expected to appear gradually with a lag.
5. The Budget for 2008-09, which marked the terminal year of the achievement of the targets under FRBMA, had envisaged fiscal deficit of the Centre at 2.5 per cent of GDP, which was lower than the 3 per cent mandated level; but the other key target, namely elimination of revenue deficit was put off by a year, with the level of deficit estimated at 1.0 per cent of GDP. As the year 2008-09 progressed, the Indian economy was seriously impacted by the twin global shocks – unprecedented increase in the global commodity prices in the first half of the year and the ripple effects of the deepening of the global financial crisis in the second half. As per the Revised Estimates (RE) for 2008-09, fiscal and revenue deficits of the Centre were placed at 6.1 per cent and 4.5 per cent of GDP, respectively.
6. Inflation, which was rising but which was in single digit up to end-May, reached double digits from June to mid-October , with the price of crude touching US$ 147 in July 2008, and remained above 8 per cent up to end-November. While overall inflation as at end-March 2009 registered merely 0.8 per cent, the group-wise inflation rates varied.
7. In 2008-09, the value of merchandise exports reached US$ 168.7 billion with a growth of 3.6 per cent despite global recession, thus achieving 96.4 per cent of the revised export target of US$ 175 billion. While export growth was robust till August 2008, it became low in September and turned negative from October 2008 to March 2009. The negative trend continued in April 2009 with export growth at -33.2 per cent.
8. The exchange rate was Rs.51.2 per US$ in March 2009, reflecting 21.9 per cent depreciation during the fiscal 2008-09. During fiscal 2008-09, out of the decline of US$ 57.8 billion in foreign currency assets (from US$ 299.2 billion on 31.3.2008 to US$ 241.4 billion on 31.3.2009), the fall of US$ 39.7 billion (69 per cent) was due to valuation change and only US$ 17.9 billion (31 per cent) was on account of net sale of dollars by the RBI.

Following are the highlights of the Indian Union Budget for FY2009-10:

>> Real and Nominal GDP growth assumed at 6.5 and 10.05 per cent respectively in 2009-10
The fiscal stimulus provided in 2008-09 at 3.5 per cent of GDP at current market prices amounted to Rs.1,86,000 crore
>> FRBM targets for the current year and for fiscal 2009-10 relaxed to provide much needed demand boost. However, medium term objective is to revert to fiscal consolidation at the earliest.
>> Total tax receipts expected at Rs 641079 crore.
>> Total budgetary allocation (expenditure) increased by 36 per cent over 2008-09 (BE) to Rs 1020838 crore; out of this Rs.6,95,689 crore is under Non-plan and Rs.3,25,149 crore under Plan; increase in plan expenditure is 34 %, while non-plan is 37 %.
>> Interest payment consists of 36% of non-plan expenditure.
>> Net market borrowing seen at Rs 398000 crore.

>> IT exemption limit raised: Limit raised by Rs 15,000 for sr.citizens (65 yrs & above to Rs 2,40,000); Limit raised by Rs 10,000 for general tax payers to Rs 1,60,000 & women to Rs 1,90,000; 10% surcharge on personal income tax eliminated
>> Corporate Tax unchanged; Minimum Alternate Tax hiked from 10% to 15% of book profits.
>> Fringe benefit tax (FBT) to be abolished.
>> Commodity transaction tax (CTT) to be removed.
>> Goods and Services Tax (GST) to meet its deadline in April 2010 The goods and services tax (GST) is a comprehensive value-added tax (VAT) on goods and services. Internationally, GST is based on supplies of goods/ services, rather than on manufacture and sales, and there are fairly elaborate rules governing the time and place of supply. In India, a dual GST is being proposed wherein a central goods and services tax (CGST) and a state goods and services tax (SGST) will be levied on the taxable value of a transaction. This reduces the burden of multiplicity of customs, excise and some other taxes presently levied.
>> Direct tax proposal would be revenue neutral Govt to gain Rs 2000 crore from indirect tax proposals

>> While retaining at least 51 per cent government equity stake in PSUs, disinvestment proceeds for 2009-10 estimated at 1120 crore
>> PPP projects particularly in Infrastructure to be given priority: IIFCL to refinance 60 per cent of commercial bank loans for PPP projects in critical sectors involving total investment of Rs.1,00,000 over the next 15-18 months.

>> Allocation to National Highways Authority of India (NHAI) for the National Highway Development Programme (NHDP) increased by 23 per cent over 2009 (BE); allocation to railways also increased over the Interim Budget allotment.
>> Allocation under Jawaharlal Nehru Urban Renewal Mission (JNNURM) stepped up by 87 per cent to Rs. 12,887 crore:
>> Allocation for housing and provision of basic amenities to urban poor enhanced to Rs.3,973 crore
>> Allocation under Accelerated Power Development and Reform Programme (APDRP) increased by 160 per cent to Rs.2,080 crore.
>> Target for agriculture credit flow set at Rs 3,25,000 crore for the year 2009-10 (actual credit flow had been at Rs 2,87,000 crore in 2008-09); interest subvention to be continued in 2009-10 to ensure that farmers get short term crop loans upto Rs.3 lakh at 7 per cent per annum; rebate for farmers paying loan on time at a lower of rate 6 per cent; 75% hike in allocation to irrigation projects.
>> Allocation under National Rural Employment Guarantee Scheme (NREGS) increased by 144 per cent to Rs 39100 crore.
>> Allocation for Bharat Nirman increased by 45 per cent Rs.40,900 crore: Allocation to rural housing (Indira Awaas Yojna) hiked by 63% to Rs 8,883 cr. ; Rs 7000 crores allocated for rural electrification scheme.
>> Allocation under National Rural Health Mission (NHRM) increased by Rs 2057 crore over the allocation in Interim Budget 2009-10 to Rs 12070 crore.
>> The overall Plan budget for higher education is to be increased by Rs 20 billion over the Interim Budget
>> Defence outlay up 34% to 104703 crore; grants for securing borders etc and for the State Polce forces enhanced over the Interim Budget allocations
>> A provision of Rs.120 crore in the Annual Plan 2009-10 made for Unique Identification Authority of India to set up online data base with identity and biometric details of Indian residents and provide enrolment and verification services across country.
>> Export Credit Guarantee scheme extended till March 2010 ; Market development assistance schemes allocation up by 180% to 124 crore ; 2% Interest subvention for exporters; interest subvention extended to March 2010 for employment extensive export sector; special fund for Small Industries Development Bank of Rs 4000 crore

>> Expert group to be set up petroleum product pricing to bring domestic oil prices in sync with global crude as 75% of our oil basket is imported.
>> Rs.100 crore set aside as one-time grant in-aid to ensure provision of at least one centre/Point of Sales (POS) for banking services in the unbanked blocks; Government to recapitalize the public sector banks over the next two years to enable them to maintain Capital to Risk Weighted Assets Ratio (CRAR) of 12 per cent.

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Development of the Indian Debt Market

2009-05-26T22:43:00.000-07:00

India's corporate bond market remains underdeveloped despite strong economic growth and significant financial system reforms, the Asian Development Bank said in a report last April. The report found that corporate borrowers continue to depend on bank loans, equity markets and private placement to meet their requirement of funds. http://aric.adb.org/pdf/workingpaper/WP22_India.

The secondary market activities in corporate bonds have started to pick up; efforts of Securities Exchange Board of India (SEBI) and the stock exchanges to bring the trading to electronic stock exchange platforms have started to yield desired results:

Date	BSE		NSE		FIMMDA		Grand Total
---	No. of Trades*	Amount(Rs. Cr.)*	No. of Trades*	Amount (Rs. Cr.)*	No. of Trades*	Amount (Rs. Cr.)*	No. of Trades*	Amount (Rs.Cr.)*
2007-08	27697	41186.73	3787	31453.14	4089	23479.01	35573	96118.88
2008-09	417376	38057.92	4902	49505.39	9585	61535.15	429642	148751.96

Indian financial markets regulator SEBI has recently issued simplified rules governing corporate debt paper, thereby making it possible to raise debt funds quicker on domestic capital markets. Companies that have already floated one debt or equity issue can now cut through several layers of paperwork when issuing another tranche. The long-winded vetting process that accompanied each issue made companies reluctant to use this route and they prefer private placement, often arranged by bankers Rs 2 lakh crore in corporate debt raised in fiscal 2008-09 has been through private placement, though this is, incidentally, a huge jump over the Rs 1.28 lakh crore raised in the previous year through the same route, it is not yet an indication of a healthy debt market which needs public issues and liquidity in the secondary market for efficient price discovery to take place. The new listing agreement, though, stipulates that an issuer must maintain 100% security cover for listed secured debt securities at all times and ensure that charges on the assets are registered. Disclosure norms have also been made more stringent to draw in investors; the issuer is required to separately mention the debt service coverage ratio and interest service coverage ratio after the item earnings per share while submitting half-yearly or annual results. Currently, institutions that invest in corporate bonds mostly prefer short-term maturity paper rather than long-term ones, high liquidity and long-term players like pension funds and insurance companies are crucial to the development of the corporate bond market in India. http://ssrn.com/abstract=421440

A long standing proposal to improve liquidity in buying and selling of government bonds .through introduction of Separate Trading for Registered Interest and Principal of Securities (STRIPS) is likely to be introduced in the current fiscal year. While initially only select identified G-Secs will be converted into STRIPS, it is expected to provide institutional investors an additional instrument for asset-liability management. A detailed explanation of STRIPS and its benefits may be found in the following article: The Strips Programme and its Implications for the Indian Gilts Market-A Note
http://www.icra.in/files/pdf/MoneyAndFinance/aprsep2002gilts.pdf

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Crisis and Investment

2009-04-16T22:23:00.000-07:00

According to a report by Barclays the pace of global output shedding has exceeded the drop in demand by a large margin, to the point where output is now well below demand, a situation that tends to bring its own reversal relatively quickly and hence augurs well for global economic recovery.
The World Bank has warned that the recession may trigger curtailment in spending, but increasing investment in public infrastructure during a crisis is the key to growth for emerging economies like India, since, infrastructure projects often take years to prepare, but postponing them has a drastic knock-on effect for medium term growth. As for project investments in India, according to the survey by Projects Today, as of March 31, 2009, there were 29,628 projects worth Rs 42,35,484 crore, a rise of 37.4 per cent in terms of investment and 29 per cent increase in terms of number of projects over the year-ago period. Going forward Projects Today expects the public sector to continue its project investment activities during 2009-10 in the critical infrastructure sectors like roadways, water supply, electricity, irrigation and community services, the same cannot be vouched for the private sector, which appears to be waiting for some more concrete signs of revival. Given this situation, the pace of project investment is thus expected to remain moderate at least in the first half of 2009-10. The industry on the other hand is concerned over prime lending rates ruling well above 10 per cent even when inflation has reached near- zero level and a debate has been raging about the need to abolish sub-prime lending to bring down the PLRs.
Meanwhile, China has unveiled a $10 billion fund and liberal credit lines to help promote a range of infrastructure projects in Southeast Asian nations reeling from the global economic crisis. China has planned to establish a China-ASEAN investment cooperation fund totaling $10 billion, designed for cooperation on infrastructure construction, energy and resources, information and communications in member states like Thailand, Malaysia, the Philippines, Singapore, Laos, Myanmar, Cambodia, Brunei, Vietnam and Indonesia.

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Indian Financial System Found to be Broadly Robust

2009-04-02T22:33:00.000-07:00

The Government of India, in consultation with the Reserve Bank, in September 2006 constituted the Committee on Financial Sector Assessment (CFSA) to undertake a comprehensive self- assessment of India’s financial sector (based on the principles of the FSAP of IMF & World Bank). The CFSA recently assessed financial stability and also compliance with all financial standards and codes so that a compact roadmap could evolve with a medium-term perspective for the entire financial sector. From this study, the Indian commercial banking system has shown itself to be sound. This is important because commercial banks are the dominant institutions with linkages to other segments in the Indian financial system, accounting for around 60 per cent of its total assets. The main results related to different types of risk include the following:

Credit Risk Stress testing for credit risk was carried out by increasing both the NPA levels and provisioning requirements for standard, substandard and doubtful assets. The analysis was carried out both at the aggregate level and individual bank level. The findings revealed that the impact of credit risk on banks’ capital position continues to be relatively muted. Under the worst-case scenario (at 150 per cent increase under Scenario I), the overall capital adequacy position of the banking sector declined to 10.6 percent in September 2008 as against 11.0 per cent in March 2008. Thus, it may be noted that even under the worst case scenario, CRAR remained comfortably above the regulatory minimum.

Market Risk To test the banking system’s resilience to market risk, interest rate risk stress tests were undertaken using both earnings at risk (EaR), as also the economic value perspective. In the EaR perspective, the focus of analysis is the impact of changes in interest rates on accrual or reported earnings. The banks have been actively managing their interest rate risk by reducing the duration of their portfolios. The duration of equity reduced from 14 years in March 2006 to around 8 years in March 2008 – a pointer to better interest rate risk management. Taking the impact based on the yield volatility estimated at 244 basis points (bps) for a one-year holding period showed, ceteris paribus, erosion of 19.5 per cent of capital and reserves. The CRAR would reduce from 13.0 per cent to 10.9 per cent for a 244 bps shock. The CRAR of 29 banks that account for 36 per cent of total assets would fall below the regulatory CRAR of 9 per cent. These results remained broadly robust for different plausible stress scenarios and assumptions.

Liquidity Risk Liquidity risk originates from the potential inability of a bank to generate liquidity to cope with demands entailing a decline in liabilities or an increase in assets. The management of liquidity risk is critical for banks to sustain depositors’ confidence. The importance of managing this risk came to the fore during the recent turmoil, when inter-bank money markets became illiquid. Typically, banks can meet their liquidity needs by two methods: stored liquidity and purchased liquidity. Stored liquidity uses on-balance sheet liquid assets and a well-crafted deposit structure to provide all funding needs. Purchased liquidity uses non-core liabilities and borrowings to meet funding needs. While dependence on stored liquidity is considered to be safer from the liquidity risk perspective, it has cost implications. A balanced approach to liquidity strategy in terms of dependence on stored and purchased liquidity is the most cost-effective and optimal risk strategy. To assess the banking sector’s funding strategy and the consequent liquidity risk, a set of liquidity ratios has been developed and analysed in detail. The analysis of this set of liquidity ratios reveals that there is growing dependence on purchased liquidity and also an increase in the illiquid component in banks’ balance sheets with greater reliance on volatile liabilities, like bulk deposits to fund asset growth. Simultaneously, there has been a shortening of residual maturities, leading to a higher asset-liability mismatch. There is a need to strengthen liquidity management in this context as also to shore up the core deposit base and to keep an adequate cushion of liquid assets to meet unforeseen contingencies.

Apart from commercial banks the report also analyses NBFCs, HFCs, the insurance sector, as well as equity and debt markets. It also looks at the financial infrastructure, including regulatory and legal infrastructure. Use the following link to read the entire report: http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1962

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Vote for Earth Hour 60!!

2009-03-23T21:56:00.000-07:00

On the 28th of March 2009 at 20:30hrs, will kick start the world's biggest movement on climate change. It is estimated that over a billion people across the world, will come forward to "Vote for Earth" by simply switching off their lights between 20:30 hrs to 21:30 hrs. It will be history in the making, as we now have over 1508 cities and towns across the world, who have already pledged their support to this global campaign on climate change. Join WWF on the 28th of March 2009 by switching off your home and office lights to switch in to this global movement on climate change and be the change you wish to see in this world. Blogsite: http://wwfindia.blogspot.com

Business Expectations in India

2009-03-23T11:26:00.000-07:00

Dr. Alamgir, thank for your comments and encouragement. We completely agree with your view on the “Signs of Recovery?” and hence the question mark. A see-saw ride is indeed the most apt description of what the Indian economy is likely to experience in the next 2 quarters at least. We do hope that investment projects will pick up once the new Government is in place. If the increased Rural demand is sustained then it would be an additional boon. Here are some survey based reports on business expectations in India. The corporate sector expects the period of downturn in the Indian economy to continue till May 2010 before bouncing back in response to the fiscal and monetary policy stimulus and abatement of recession in the international economy, an ASSOCHAM Business Barometer (ABB) Survey of 237 CEOs has revealed. The ABB Survey “Economic Outlook for India” was based on the responses from 237 CEOs and Managing Directors across fifteen sectors at small, medium and large scale level companies. The survey was done during the month of February. In the ABB Survey, 84 per cent of the CEOs polled across various business segments were unanimous about the view that poor Business Confidence in India may extend till the middle of the next year. Around 77 per cent of the industry heads believed that the growth rebound would be faster and sooner in India than the developed economies of US and Europe. In its 12th Annual Global CEO Survey, PWC said confidence of CEOs had plunged to its lowest level since 2003, when PWC began tracking CEOs' forecasts. Worldwide, just 21 per cent of CEOs said they were very confident of revenue growth in the next 12 months, down from 50 per cent in last year's survey. And more than a quarter of CEOs said they were pessimistic about prospects for the coming year. However, the business in India painted a contrasting picture with 70 per cent Indian CEOs expressing confidence about both short term and long term revenue growth, compared to 21 per cent and 34 per cent globally. India has recorded the highest CEO confidence levels amongst the emerging economies, and is also one of only two countries globally which are as confident about short term revenue growth as about long term revenue growth. Despite the global economic downturn affecting even the emerging economies, Indian CEOs continue to be very optimistic. India's economic growth is seen slowing to 5.5 percent in 2009/10 from an estimated 6.8 percent in the current fiscal year ending in March, Citigroup said in a recent note. However, it expects policy measures and lower commodity prices to set the stage for a pickup in 2010/11.
* Growth could decelerate due to contraction in exports, single-digit investment growth and moderation in consumption.
* Inflation could see a "negative patch" during June and September, and should average 3 percent in 2009/10, compared with 9 percent this fiscal.
* Citigroup said it expects an additional 100-150 basis points easing in interest rates in 2009/10 on the back of benign inflation and limited fiscal space and the continuation of indirect fiscal measures as the country's high fiscal deficit limits the scope for a direct fiscal stimulus.
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Signs of Recovery?

2009-03-13T00:35:00.000-07:00

Even as US jobless claims continued to rise, retail sales slipped and businesses slashed inventories for the fifth continuous month, JPMorgan reported some signs of recovery. According to Larry Cudlow, consumer incomes, after tax and adjusted for inflation, have increased for five straight months, which is largely from the tax-cut effect of plunging energy prices. Housing affordability is at a record high. Purchasing-manager surveys are now bottoming out and the Treasury curve has been normalizing from its inverted shape, usually taken preceding a recession. Barclays too reported that commodity prices, including oil, have started to bottom out and are likely to rise in the second quarter. China's economic leaders held that according to economic statistics, the economy was already reviving in response to swift action to counter the shock of the global financial crisis. In India too, even though Industrial output dipped in January, but a strong double digit (15.4%, yoy) growth reported by the Consumer Goods sector hinted at recovery in demand and easy credit availability. FDI to India has shot up by 90% during the April-November period of the current fiscal, despite the global crisis conditions. One can only hope that Indian infrastructure would be toned up in the near future with strong government investment, as more than a third of corporate heads have gone on to say in a study conducted by KPMG and EII, that Indian infrastructure is very much inadequate to support their growth plans. Govt spending in this sector would also help to revive demand as earnings of workers in labour-intensive sectors are falling; average earnings was down by 3.5% per month in the third quarter of this fiscal. With the INR plunging to record lows, the labour-intensive Indian textile industry hopes to gain, as this export-oriented industry as these goods become cheaper in the international market due to the falling rupee.
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Market Meltdown in Early March

2009-03-09T00:52:00.001-07:00

The markets slipped to over three-year lows this week, in tandem with world markets, which also tumbled to multi-year lows. The Sensex, which began the week with a negative gap of 129 points at 8,763, hit a low of 8,047. However, the index recovered partially and closed the week with a loss of 6.4 per cent (566 points) at 8,326. With the stock market buckling under negative global cues* and heavy selling by foreign investors, shares of over 160 firms, including Reliance Communications, Ranbaxy Labs and Suzlon Energy, plunged to their all-time lows. FIIs have sold as much as Rs 458.30 crore in Indian equities in the first week of March and their total sell off in 2009 amounting to Rs 2,114.60 crore. Trading volumes in index options have been steadily rising, as a result of investors seeking a hedge against volatility in a declining market. In December, the average daily contracts in index options (NIFTY, MINIFTY AND BANKNIFTY options) on NSE was 10,07561. This rose in January to 10,60,784 and in February to 11,30,273. The first few trading days of March have seen index option volumes rise on a daily basis; on Friday index options reached a record 16,77,878 contracts on the exchange. The open interest positions in Nifty options are also high, indicating a bearish view on the Nifty according to brokers. *The number of US bank failures is mounting as 17 lenders went bankrupt so far this year amid the deepening recession in the world's largest economy; in February 2008, 10 banks were closed down, making it the highest for any month since 2000. A total of six banks had failed in January and one in March. The US unemployment rate has moved to a record high of 8.1% in February.
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India’s External Sector Suffers the Brunt of Global Meltdown

2009-03-03T22:37:00.000-08:00

The global recession has impacted India’s external demand in strong way; the deceleration in export began in October 2008 and every month since then growth has been negative with the worst decline of 16 per cent now in January 2009. The hardest-hit sectors include handicrafts, carpets, cotton yarn & fabrics, gems & jewellery, computer software, coal and minerals, oil meals and rice. Foreign trade figures compiled by the DGCI&S and released by the Department of Commerce show exports in January at $12.38 billion were 15.9 per cent lower than $14.71 billion in the corresponding month of 2008, while imports at $18.45 billion were 18.2 per cent lower than $22.56 billion in the comparable month. Oil imports during January 2009 were lower by 47.5 per cent at $4.46 billion (compared with $8.50 billion), reflecting the steep drop in global crude prices. The sharp drop in imports had a flattering effect on the trade deficit, which at $6.07 billion in January 2009 was lower than $7.84 billion in the same month a year ago. The outlook for exports and employees working in export industry continues to be perilous unless bold measures are put in place such as increase in drawback and the DEPB rates, abolition of fringe benefit tax and exemption from service tax and neutralisation of higher costs of credit through interest subvention, as pointed out by FIEO.
The cumulative value of exports in April-January 2008-09 at $144.26 billion shows a growth of 13.2 per cent compared to $127.45 billion in the corresponding month of 2007-08. While imports at $243.35 billion was 25.3 per cent higher than the corresponding amount of $194.28 billion. In rupee terms, the growth in import was 39.4 per cent higher (at Rs 10, 90,182 crore as against Rs 7, 82,207 crore). As the rupee has been steadily depreciating against the dollar, exports in rupee terms registered a modest 4.3 per cent increase at Rs 60,460 crore against Rs 57, 948 crore. With overall import growth registering a 25.3 per cent spurt in the first 10 months of the current fiscal and exports growing at 13.2 per cent, the trade deficit has zoomed to $99 billion, against $66.83 billion in the comparable months of 2007-08.

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The Third Stimulus Package

2009-02-24T22:34:00.000-08:00

The Indian Govt has announced a slew of indirect tax concessions to bolster sagging demand for industrial goods and services. The stimulus includes the reduction of the excise duty rate to 8 per cent from the existing 10 per cent for sectors such as auto, steel, consumer durables, FMCG, and IT hardware & peripherals; (about 96 per cent of the country’s excise revenues hitherto came under the 14 per cent rate, which was recently lowered to 10 per cent and now to 8 per cent.) Also, excise duty on bulk cement has been reduced; bulk cement prices may be reduced by Rs.4 per 50-kgs. Service tax rate on taxable services have been brought down from 12 per cent to 10 per cent, so utility services may cost less, telecom, hospitality, tourism and aviation sectors should lower charges. The tax concessions would entail revenue sacrifice to the tune of Rs.30,000 crore (in a financial year) and has not been factored in the Budget estimates for 2009-10.
Standard & Poor’s (S&P) changed its outlook on India’s long-term sovereign credit rating from stable to negative. This outcome is expected given the slowdown in growth and rising fiscal deficit. In fact, the global credit rating agency reasoned that the revision in outlook reflects its view that India’s fiscal position has deteriorated to a level that is unsustainable in the medium term. S&P, however, affirmed its ‘BBB-’ long-term and ‘A-3’ short-term sovereign credit ratings on India.

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To Dr. Jalal Alamgir

2009-02-10T02:16:00.000-08:00

Thanks for joining our blog. Your concerns are indeed well placed. Year 2009 or at least the first half of fiscal 2009-10 is going to be a difficult phase for the Indian economy. To emphasize the problems recent data on the domestic manufacturing sector which is the second largest employment generator after agriculture shows that —of the 96 manufacturing segments covered under the CII-Ascon survey, 32 recorded a negative growth.
The worst hit segments include fertiliser, polymers, steel, pig iron, motor starters, castings, textile machinery, distribution transformer, HCV's, LCVs, rubber footwear and auto cycle tubes. These numbers could indeed worsen in the next 2/3 quarters.
However, as you know, the government and the central bank have acted several times and are continuously monitoring the situation. The consequent high fiscal deficit should not hamper the flow of foreign investments, according to the Deputy Chairman of the Planning Commission, as high fiscal deficit due to the current economic downturn is a global phenomenon and not particular to India. The positives are: despite slowing down in the recent months as rightly pointed out by you, FDI has increased 75% in the current calendar year and 90% in the current fiscal year (over the same period, till November 2008); for 2008-09 the Indian economy will possibly turn in the second-fastest growth rate in the world at 7.1%, after China’s 8%, keeping India as an attractive destination for new FII and FDI flows; the February 16 interim budget is expected to contain more spending plans to support the economy for the first four months of the next fiscal; interest rates may be reduced further keeping alive the FII flows to the Indian debt market, which has indeed played an important role during the equity market meltdown; PSBs have reduced their lending rates to encourage industry and particularly the real estate sector. So as and when the global or even US downturn shows signs of bottoming out, India should recover and recover faster than many other economies. The political environment is not likely to cause divergence from the growth orientation of India’s economic policies.
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2009-02-03T20:43:00.001-08:00

The financial crisis has triggered a larger than expected fall in world trade growth according to the WTO; Global trade which had grown 8.5% in 2006, slowed to 5.5% in 2007 and is estimated to be down to 4.0% in 2008. Growth in dollar terms exceeded 20% in the first half of 2008, started contracting in the third quarter and turned negative in November. Currency valuations and commodity price rises inflated growth in value terms in the first half, and also accentuated the decline in the second half of 2008.

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2009-02-02T21:02:00.000-08:00

US consumer spending slid for an unprecedented sixth straight month in December, feeding the already painful recession as households opted to save rather than buy. The 1 per cent drop in consumer spending, the economy's key driver, means little help in sight for struggling retailers, homebuilders and automakers. The Institute for Supply Management's benchmark factory activity index rose to 35.6 in January from 32.9 in December; however, this may not yet be the beginning of a recovery.

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More on Financial Crisis

2009-01-30T02:07:00.000-08:00

According to the IMF, World growth is projected to fall to just ½ percent in 2009, its lowest rate in 60 years; advanced economies will experience their sharpest contraction in the post-war period, while, emerging and developing economies, though more resilient than in previous global downturns will also suffer serious setbacks. Despite wide-ranging policy actions by governments and central banks around the world, financial strains remain acute, pulling down the real economy. The IMF has raised its estimate of the potential deterioration in US originated credit assets held by banks and others from $1.4 trillion last October to $2.2 trillion in end January.

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Unfolding of the Global Financial Crisis

2009-01-27T01:50:00.000-08:00

Financial Crisis & the Global Economy
The global economy is now facing its worst prospects in more than half a century, with increasing financial losses, falling asset prices, and a deep downturn in real economic activity. Several developed economies including the US, UK, Japan and Germany are already in recession. Overall global GDP growth is projected to decline by the World Bank, from 2.5 per cent in 2008 to 0.9 per cent in 2009, the weakest since records became available in 1970. International trade would decelerate sharply, with global export volumes declining for the first time since 1982. As labor market conditions have deteriorated, consumer spending, business investment, and industrial production have also declined, the Federal Reserve lowered the target for its benchmark interest rate and established a target range for the federal funds rate of 0 per cent and 0.25 per cent. The European Commission in November unveiled an economic recovery plan worth €200bln.with aims to save further job losses, stimulate spending and boost consumer confidence. The ECB has reduced its key policy rate from 4.25 per cent in September to 2 per cent by mid-January. The British central bank has reduced interest rates four times since April from 5.0 per cent to 1.5 per cent. The latest half-percentage point cut in January 2009, that brings the rate to its lowest level in the central bank's 315-year history, was necessitated by weakening consumer spending, a tightening credit market for households and businesses, and a deteriorating business and residential investment outlook. Bank of Japan has cut interest rates from 0.5 per cent to 0.3 and then to 0.1 per cent by mid-December, and has adopted several liquidity enhancing measures. The Bank of Korea lowered its Base Rate from 5.00 per cent in early October to 2.50 per cent by January 2009. China has cut lending rates considerably since mid-September and unveiled a 4 trillion-yuan fiscal stimulus package in early November to rejuvenate the weakening economy. The Bank of Thailand cut the benchmark interest rate by 75 basis points to 2 per cent in January, the decision, which follows a 1-percentage point reduction in December, is more aggressive than expected.

In early September, mortgage lenders Fannie Mae and Freddie Mac, which account for nearly half of the outstanding mortgages in the US, were rescued by the US government in one of the largest bailouts in US history. Lehman Brothers filed for bankruptcy protection, becoming the first major bank to collapse since the start of the credit crisis. . During this time US bank Merrill Lynch, agreed to be taken over by Bank of America for $50mln. to avoid bankruptcy. The US Federal Reserve announced an $85mln. rescue package for AIG, the country's biggest insurance company, to save it from bankruptcy, in return for an 80 per cent public stake in the firm. Following a run on its shares Britain's biggest mortgage lender HBOS was taken over by Lloyds TSB in a £12mln. deal creating a banking giant holding close to one-third of the UK's savings and mortgage market. Soon after, Washington Mutual, the giant mortgage lender which had assets valued at $307mln., hit by mortgage defaults was closed down by regulators and sold to JPMorgan Chase. By the end of September, the credit crunch hit Europe's banking sector as the European banking and insurance giant Fortis is partly nationalised to ensure its survival. This was followed by a wave of nationalisations and government bailouts, as well as increased deposit gurantees for major European banks and mortgage lenders.
The UK government announced plans to pump £37bln. In to three UK banks Royal Bank of Scotland (RBS), Lloyds TSB and HBOS, in one of the UK's biggest nationalisations. The US government unveiled a $250mln. plan to purchase stakes in a wide variety of banks in an effort to restore confidence in the sector. South Korea announced a $130mln. financial rescue package to stabilise its markets - by offering a state guarantee on banks' foreign debts and promising to inject capital into struggling financial firms if necessary. The Dutch government injected €10bln into the banking and insurance company ING; the government had earlier announced the establishment of a €20bln fund to protect the financial sector from the credit crisis. Sweden's government announced credit guarantees to banks and mortgage lenders up to 1.5 trillion kroner ($205 bln.) and also set aside 15 bln. kroner as a bank stabilisation fund. In end November again, the US government announced a $20 bln. rescue plan for troubled banking giant Citigroup after its shares plunged by more than 60 per cent in a week. The US Treasury created the capital purchase program as part of the Troubled Asset Relief Program (TARP) and allocated $250 bln. under the program to invest in US financial institutions; this is the first time the US Treasury has recapitalized private banks. Towards end November, Pakistan and Iceland received emergency loans from IMF, Iceland being the first western European nation to require an IMF loan since 1976, due to the failure of of Landsbanki and Ghitmir, the second and third largest Iceland banks.
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2009-01-20T20:57:00.000-08:00

In the New Year we again invite you to visit our renewed website www.ecofin-surge.co.in which now offers a collection of latest Economic and Financial News and Reports and Tools for your convenience.
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Data on India & Global Economy

2008-07-02T22:32:00.000-07:00

ECOFIN-SURGE is an endeavor to provide information support to anyone interested in researching the Indian and International economy. This website provides ECOnomic & FINancial historical time Series data, regular Updates and Reports on the Global Economy.
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