Emerging Market

Indian Economy Next Quarter

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

India : Kal, aaj aur kal

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

The Economic Survey 2008-09 also sees growth in the 6.5-7.5% range this year, assuming a normal monsoon and a bottoming out of US recession by September. This is in line with our growth estimate of 6.6% given a few months earlier. Returning to the high growth path of recent years however needs significant reforms, says the Survey and presents a formidable wish-list of measures. Suffice to say, this hope will not materialise in the near future.

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

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

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

Economic Growth

• IIP for April posted a positive growth of 1.4% over last year, while there were significant upward revisions in previous months estimates. March growth was revised from -2.3% to -0.8% and there is still one more revision to go for the final number for March.
• January IIP growth was revised to a final positive 1.0% from its first estimate of negative 0.5%.
• Infrastructure sectors showed a subdued growth of 2.8% in May compared to 3.1% last year. Good performance from coal(10.2%) and cement (11.6%) boosted the index, while crude oil and petroleum refinery products declined by 4.3% each.
• The Markit PMI survey showed a slight decline in the manufacturing output index in June, but still at 55.34 was above the threshold of 50 that separates expansion from contraction.
• Provisional estimates of electricity generation for the month of June show growth at 8.11%, compared to 2.55% last year.
• Media reports good auto sales with Maruti and Hero Honda leading the growth as before with 22.5% and 23.7% respectively. However, in June others like Yamaha, Hyundai, Tata and Fiat reported positive growth in sales.
• During May, revenue earning freight traffic carried by the Railways increased by 2.54% over last year. Revenue earnings rose by 2.34% in the period April-May over the same period last year, while Net Tonne Kilometres rose by 3.61% during April-May.
• Telecom subscribers increased by 11.44 million in May, bringing tele-density to 38.88% in the country.
• Hiring according to the Naukri Jobspeak was lower in May than in April, the index standing at 644 compared to 677 the previous month.
• Delayed rains and heat have hit sowing for oilseeds and pulses. Groundnut acreage sown was down 54.8% as on June 19th, compared to last year, while Moong was down 35.2%.
• Water level in reservoirs fell below the 10 year average in March and reached alarming levels by June with lack of rain. 11 reservoirs, primarily in Maharashtra and Karnataka have no live storage.

Inflation