Indicus Analytics, An Economics Research Firm

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The Emerging
Economy
– Monthly Newsletter from
Indicus Analytics
9th March 2009

Highlights
• The organized sector reels under the
slowdown – will get worse this summer.
• Slowdown perceptible across economy -
auto, cement, telecom bring small joy.
• As predicted RBI cuts rates reluctantly in
March – this effort will fail as well.
• Government bent upon making it worse –
resorts to highest ever borrowings.
• India rating crashes, set to fall further.
• Lower agri output spells bad news for
prices ahead.
• Hardly any signs of turnaround yet – but
hope can sometimes carry the day.

India: Kal, aaj aur kal

We did say last time that if the RBI cuts rates, it

would do so only in March – that’s what happened,
and as we expected (as did the RBI) the markets
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were not impressed. The monetary overtures were

overshadowed by the grim news on the fiscal front,
as the government put forth demands for the
highest borrowings ever of Rs. 3.6 trillion. The flip-
flop over the budget was particularly disturbing, as
was the three times revision of borrowings over the
year – all with not a bit of apology. The problem is
that under the excuse of ‘exceptional times’, all
that talk of moving towards controlled budgeting
and market based pricing in fuel has gone up in
vapour. Meanwhile, amidst all this turmoil, we don’t
have a full time Finance Minister, a clear indication
that the economy really isn’t a priority.

The quarterly GDP data is showing a sharp falling

trend; even though we take this data with a pinch
of salt, we would advise everyone to take the
falling trend very seriously. International efforts are
showing that nothing is working quickly enough,
and we also know that no macro-economic models
are working.

So what should the government do? When no one

knows what to do, go back to first principles. The
first principles are, spend your money where it has
the most impact. But that is not what the
government is doing, and is throwing away its
money. It is trying to help the organized sector, by
giving them all sorts of interest and tax
advantages – but these only help those firms that
have orders. What about firms whose orders are
falling or non-existent? These firms need a lifeline.
The lifeline could be on the credit front, where the
government can ask FIs to distinguish between
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company specific and structural/economy-wide

shocks and resultant defaults. But there is no such
move. As toplines fall, banks reduce credit for
working capital – but that is precisely when firms
need more leeway. The list is very long.

Meanwhile, real estate firms are in deep trouble,

and it is surprising that real-estate prices have not
fallen more; this only indicates that the banks have
restructured the terms of credit. In other words,
they have delayed the bad news. The hope must
be that, after a quarter or two things will improve;
but they are sorely mistaken. This is not a short
term slowdown for the real estate sector, and it is
not going to see high growth for a long time. The
more rapidly we correct the prices, force the
companies to reveal the extent of the shock, the
better it is for India’s economic stability.

Then there are those who think that the gvernment

can spend its way out of this. The reasoning is,
that since there is an international recession,
prices will remain low, so we can spend as much as
we want without fear of inflation. This is a flawed
argument, if we spend large amounts, it will
increase demand in the country, and to keep prices
low, we will need to keep international trade very
open – that is, import more. The hit will then be
taken on foreign exchange reserves (already down
by USD 60 bill), and further impact our ratings if
nothing else. The point is, to try and limit one loss,
we will need to take a hit somewhere else.
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The government also needs to ensure that when

times do turn-around, India can access
international funds – but the large fiscal deficit has
powered the downfall of our credit ratings, give it a
few months and we will not be in the investment
grade anymore. At that time, even if the world will
want to invest in India, it will be unable to, as their
regulations will prevent them from doing so. Do
we have any credible policy measures in place to
tackle this upcoming problem, or are we just
hoping for the next government to bear the
headaches?

Going ahead, while this quarter is still set to be a

gloomy one, there are some small signs of spring-
time joy, (Feb auto sales, price of copper at 3
month high, cement sales up, easing of loan rates
from banks etc.) but it is difficult to read too much
in these random data elements. Anycase, we do
not foresee a smooth path ahead, returning to our
recent 9% growth level is a government dream, if
we can do 7%, we should be happy.

In April, two shows will roll - the IPL and the

elections – no prizes for guessing which one will
boost sentiments more, which one will boost the
economy more.

P.S. We have started a blog with contributions from

Indicus and guest authors too, do join us at
www.indicus.net/blog
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Sumita Kale and Laveesh Bhandari

7th March 2009, Indicus Analytics

Dr. Sumita Kale is Chief Economist, and Laveesh

Bhandari is Director, Indicus Analytics. They can
be contacted at sumita@indicus.net and
laveesh@indicus.net.

Economic Growth

• GDP Q3 estimates showed slump in

growth to 5.3%, slowdown in all sectors,
and negative 2.2% growth for agriculture.
• Advance estimates of 7.1% growth given
by CSO coupled with Q3 estimates
released later implies an unlikely 7.5%
growth in Q4 – expect downward revision
of this year’s growth.
nd
• 2 Advance estimates for 2008-09 put
agricultural output down by 1.26%, one of
the few crops to show positive growth is
rice.
• Sugarcane output is down 17% -
explaining the rise in sugar prices.
• Manufacturing output has been showing a
contraction – IIP for December fell by 2%,
with downward revisions in November
data.
• Electricity is a sector that has been under-
performing, showing the systemic failure
of our infrastructure – February generation
was flat over last year at 0.25% growth.
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• January infrastructure numbers show

growth by 1.4%, compared to last year’s
3.6%. Again, cement and coal are holding
up the show.
• Cement production grew by 8.5% in
January, while despatches rose by 8.3%.
February sales as reported in the
newspapers are also up and promising.
• The ABN-AMRO PMI survey of 500 firms
showed that there was another marginal
rise in the index for February, over the last
month, but still a contraction in the overall
index.
• While auto sales picked up speed in
February, firms are hesitant to call it a
reversal in the falling trend. Except for
Bajaj Auto, all two-wheelers saw double-
digit growth in February, while car sales
were high with Maruti and Hyundai
leading the pack in growth.
• A record number of 15.41 million
subscribers were added in the wireless
telecom segment in January, as against
the 10.7 million added in December and
8.7 million added in January 2008.
• Revenue earnings from railway freight
grew at 12.85% in the April-January
period, Net Tonne Kilometres rose by
5.78%, no significant change over
previous year’s 12.34% and 6.74%
respectively.
Read:
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Green shoots

Recession compounds world food crisis

Inflation

• Consumer price inflation rose in January

marginally with the CPI AL and CPI IW
indices registering 11.62% and 10.45% rises
respectively.
• The WPI continues on its downtrend,
provisionally at 3.4% average for February.
• The NCDEXAGRI index of spot prices of
agricultural commodities, which had
plunged from its July highs, has been in a
band since October, showing more stability,
but all still at a higher level than last May.
• Crude oil has moved in the range of 39 to
47$ a barrel in February, leaving behind the
low of $33.73 touched in end-December.
• Copper shows a similar bottom in the price
chart so far, leading some like Mecklai to
wonder if the bottom has been reached in
manufacturing. Iron ore prices however
continue to decline, reflecting diminished
demand.
• Sugar has been hit by reduced output,
prices rising by 15% in 3 months, with
demands now for import of refined sugar to
bring prices down.

Read
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Food prices to stay volatile over next decade –

UN

Interest Rates

• High borrowing needs of the government

and revised fiscal deficit of 6% of GDP for
this year, with 5.5% of GDP estimated for
2009-10, has brought pressure on the bond
prices, raising yields.
• RBI cut rates as expected early in March but
need for higher borrowings keeps yields
high.
• The 10 year gilt 8.24% 2018 Gsec rose to a
high of 6.6415% towards the end of the
month and then to 6.75% on March 6th, a 3-
month high.
• RBI contracted transfer of MSS bonds to the
government’s cash account to keep a lid on
the rate rise.
• In the second week of March, central and
state governments are set to raise Rs.
36,000 crores putting more pressure on the
markets.
• Bank of England crashes rates to a record
low of 0.5%, following the Fed, and begins
quantitative easing – unprecedented step of
printing money.
• ECB cuts rates to 1.5%, warning calls of
‘overshooting’ (see reference below).

Read
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ECB’s Bini Smaghi – Central banks should not

overshoot with rates

Exchange Rates

• Exports fell by 15.9% in dollar terms in

February, rising by 4.2% in rupee terms,
while imports grew by –18.2% in dollar
terms and 1.4% in rupee terms.
• Trade deficit rose to $444 billion for the
period April-January compared to $ 269
billion for the same period last year.
• The rupee has taken a hit with funds pulling
out of the country, with S&P’s placing India
in negative rating category, coming close to
52 to a dollar.
• All currencies, including the Swiss franc
have been beaten down against the dollar,
as long as the dollar demand remains from
the global banking system, expect dollar to
stay strong.

Read

Debate: will the economic crisis weaken the rupee?

View of the day – dollar strength will linger

The inertia of motion

The global crisis debate

Lessons from the current crisis

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The results of living it up

Will inflation strike us back in 2009-10?

Lip service

The Left’s record

The sorry state of West Bengal

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