AddA - Depreciating Rupee

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Kaynes Vs. Hayak (Round #2)

Kaynes Vs. Hayak

Interesting Economics Angle of Jan Lokpal

http://blogs.wsj.com/indiarealtime/2011/10/17/economics-journal-how-the-jan-lokpal-bill-would-hurt-india%E2%80%99s-poor/

Screening of "Inside Job"

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SPEconomics Vol-1 Issue#3

Food inflation and global headwinds dominate speculation regarding the RBI’s policy going forward.

The Eurozone debt crisis remains at the forefront with repercussions seen across equity and currency markets. Concerns about the US economy persist with the White House downgrading its economic outlook.

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GDP Update - Q1 2011-12

·  Overall GDP Growth :

GDP grew by 7.7% (y/y) in Q1 2011-12, largely in line with the market expectation for reading of around 7.6%.

The strong growth (y/y) was maintained under the agriculture and services segment. The industry segment growth in present quarter softened over same quarter of previous fiscal.

·  Agriculture output : It grew by 3.9% (y/y), which was considerably strong compared to 2.4% growth seen in the same quarter of previous fiscal.

v  According to today’s release, the production of Food Crops - rice, wheat, coarse cereals and pulses during  the  Rabi  season  of  agriculture year 2010-11 (which ended in June 2011) recorded growth rates of 11.3%, 6.3%, 0.7% and 4.9%, respectively over the production in the corresponding season of previous agriculture year.

v  Among the Commercial crops, the production of oilseeds increased by 12.0% during the Rabi season of 2010-11 (which ended in June 2011).

·  The Industry segment of GDP grew by 6.7% in Q1 of 2011-12, which was lower compared to 9.7% growth seen for Q1 2010-11.

According to the estimates available on IIP (new series) for Q1 2011-12 :

SEGMENT of INDUSTRY	Y-O-Y Growth (%)
MINING	1.0
MANUFACTURING	7.5
ELECTRICITY	8.2

·  The Services segment of GDP grew by 8.9% (y/y) in Q1 2011-12, against 10.1% growth observed same quarter previous fiscal.

v  Among the services sectors, the key indicators of Railways, namely, the net tonne kilometres and passenger kilometres have shown growth rates of 6.3% and 6.1%, respectively during Q1 of 2011-12.

v  In the Transport and Communication sectors, the sales of commercial vehicles, cargo handled at major ports, cargo handled by the civil aviation, passengers handled by the civil aviation registered growth rates of 14.1%, 5.2%, 4.9% and 14.6% respectively during Q1 of 2011-12.

v  The total stock of Telephone Connections (including WLL and cellular) registered growth of 34% during Q1 2011-12. The other key indicators, namely, aggregate bank deposits, and bank credits have shown growth rates of 18.7%, and 21.0%, respectively during Q1 of 2011-12.  

·  New series of IIP (base year 2004-05)  :The current release has seen new series of IIP (base year 2004-05) being used for compilation of GDP data.

v  The usage of new series of IIP data has resulted in revisions under the heads of mining, manufacturing, electricity, and trade, hotels and restaurant sectors in GDP.

v  Accordingly, the data for Q1 2009-10 and 2010-11 has seen considerable upward revisions under the manufacturing sub-segment; while there have been marked downward revisions under the trade, hotel, transport and communications sub-segment.

·  On the Expenditure side, GDP growth for Q1 2011-12 was at 8.5% (y/y) compared to 9.1% seen same quarter previous fiscal.

v  Personal consumption slowed to 6.3% (y/y) in Q1 2011-12 compared to 8.0% seen in Q4 2010-11 and 9.5% in Q1 2010-11.

v  The Government consumption fell sharply to 2.1% in Q1 2011-12, against a growth of 6.7% recorded same quarter previous fiscal.

v  The growth in Gross Capital Formation too was slower at 9.6% in Q1 2011-12, against a growth of 12.1% seen in Q1 2010-11.

·  The introduction of new IIP series has also led to revision of estimates under Private Final Consumption Expenditure (PFCE), and Gross Fixed Capital Formation (GFCF), which are the components of the expenditure side of GDP. Accordingly, the PFCE has seen downward revisions for both Q1 2009-10 and Q1 2010-11. On the other hand, the GFCF has seen upward revision in Q1 2009-10 and downward revision in Q1 2010-11.  

·  For the fiscal year 2011-12, we continue to expect sub-8% real GDP growth, factoring impacts of continued slowdown in advance economies and moderation in emerging market economies.

v  Domestically, the high rate of inflation and tight monetary policy is expected to negatively impact the second quarter GDP data. However, as the inflation pressures recede and monetary policy tightening peaks out, we expect to see better growth numbers in Q3 and Q4.

v  As regards the September monetary policy review, despite visible moderation in the economy, the bias of the policy may tilt towards further tightening if the upcoming inflation data is seen nearing double digit levels.

August Review: India at Crosswinds

India seems to be caught in the crosswinds of changing global and domestic environment. It’s been an eventful last month with global markets coping with

§  Sovereign rating downgrade of the US from its top notch “AAA” status.

§  lingering solvency concerns in Europe that have spread from Greece to larger countries such as Italy and Spain.

§  fears of a double-dip recession in the US amidst shaky growth prospects in the UK, Euro area and Japan. 

Global growth and markets: The going will get “tough”

v  The downgrade itself was largely anticipated with the degree of fiscal consolidation agreed upon by the US government(USD 2.4 trillion over a 10-yr period) in lieu of a USD 2.1 trillion increase in its debt ceiling falling short of the required USD 4 trillion of deficit reduction suggested by S&P to stabilize sovereign debt.

v  Fiscal consolidation is likely to pull down US GDP growth going ahead.However, with signs that the US recovery has turned brittle the rating move has focused the spotlight on what the final fiscal consolidation plan - no matter how inadequate it may be from a solvency perspective- means for US growth going ahead.

v  Consensus forecasts estimate 2011 US growth at 1.5-1.8%-not exactly “recession” levels but considerably lower than the “2%” potential growth tracked by policy authorities and lower than 3% growth recorded in 2010.

Medium-term growth prospects are unlikely to look any better with a large portion of the fiscal consolidation efforts likely to kick in by the beginning of 2012.Add to this the equally bleak growth prospects in Europe, UK and Japan and there is little to cheer about by way of global growth prospects.

Global Growth prospects (Source: Capital Economics, IMF & HDFC Bank)

The only positive that has come out of this de-scaling of global growth forecasts has been the correction in commodity prices. Brent crude oil prices have fallen by 11% from their peak in April, 2011 and are currently trading at USD 113 per barrel while the CRB spot index is down 7% from its peak earlier in the year.

Why positive:                                    

With government balance sheets stretched significantly, this accommodation is likely to come from easier monetary policy. While the prospect of monetary easing is strong, it is not yet a done deal. With US unemployment levels remaining sticky at 9.0-9.2% and growth likely to remain anaemic there is little choice for the Federal Reserve to embark on the third round of quantitative easing or “QE-3”.

The question of course is-when? US inflation levels have been inching higher over the last year as a result of firm commodity prices and it will be a lot tougher for the Fed to defend further monetary expansion now than it was during previous rounds of quantitative easing in October, 2010 and September, 2008. Core inflation for instance is currently close to 1.8%-twice its level last year.

Assuming that another round of monetary easing will be announced, commodity prices could reverse after turning down but given the prospect of slow growth are unlikely to spike. Thus, while the correction in terms of a drop in prices could be shallow we are likely to see a period of stability.

Firm inflation is therefore unlikely to sustain beyond a point. Our sense is that stabilizing commodity prices as well as weak demand is likely to start reflecting in both the headline and core inflation readings by 4Q2011 and pull them lower thus paving the way for quantitative easing by early 2012.

 Domestic front: A Re-assessment

A re-assessment of Domestic Growth Outlook done Last month:

                                                                                                                       

Sector	FY10	FY11	FY12
Agriculture and allied activities	0.4	6.6	3.0
Industry	8.0	7.9	6.5
Services	10.1	9.4	9.5
GDP at factor cost	8.0	8.5	7.7

Magnified view of Reasons for Re-assessment:

A.   Impact of the External Environment

1.    Exports Momentum

Recent trends in exports:

v  There has been an active de-risking of the export portfolio away from developed countries over the last few years cushioning export momentum from subdued growth in these countries. For instance, the share of exports to OECD countries fell from over 40% in 2006-07 to 34% in 2010-11 while exports to developing countries increased from 40% to 42% and that of the OPEC region increased from 17% to 21%.

v  Further, there has been a conscious effort to move the product mix of exports towards high value added items such as engineering goods, petroleum products and gems and jewellery over recent years and this has provided rich dividends.

      

But despite above measures, US, Euro area, UK and Japan markets still form a sizeable share of the export portfolio and the newer markets lack the depth required to sustain the high export growth rates at present.

After factoring in the changing market and product profile of exports, we expect export growth to normalize bringing FY12 export growth to 25% -not a feeble print given the state of the global economy but decidedly lower than the 81% export growth recorded in July,2011.

2.    External Liquidity

With foreign exchange reserves at USD 316 bn there is enough cushion to offset extreme pressure on the external balance sheet. Indeed, assuming negligible net foreign inflows current reserves can buy India 8 months of imports and 40% of the reserves are enough to pay off debt obligations falling due over the next year. The situation however is unlikely to turn so extreme.

Facts

v  Import growth is likely to moderate in line with domestic demand and this is likely to mean that the current account deficit in FY12 is unlikely to deepen much more than the 2.5% of GDP level it was at in FY11. We expect import growth to slow down to 24% from its current growth rate of 40% leaving a current account deficit of 2.7% of GDP .

v  Portfolio flows into equity markets are likely to remain weak as uncertain growth prospects weigh on global and domestic markets but external debt inflows could somewhat compensate for this.

v  Interest differentials are likely to remain in favour of external funding and debt flows such as ECBs and short-term trade credit and this could help fill up a portion of the gap from thinner portfolio flows.

v  Additionally, fastracking of FDI proposals by the government is likely to see a sizeable pick up in direct investment from abroad.

On balance, net foreign inflows are likely to be close to USD 10.2 bn in FY12-a touch lower than the USD 13.6 bn of net foreign inflows in FY11.

B.   Larger risks from within the economy

1.       Inflation likely to remain sticky for some more time…..

v  While non-food primary article inflation has cooled from 27% in April,2011 to 15.5% in July in response to global prices, an administered increase in domestic fuel and food prices as well as the pass through of past input cost pressures to manufactured goods prices has meant that domestic inflation has decoupled from global price patterns.

v  Food price inflation has reversed its declining trend in recent months picking up to 9% for the week ending August from 8.2% a month ago while manufactured goods inflation has remained firm at 7.0-7.5% keeping headline inflation sticky in the 9.0-9.5% range

v  Further, core (non-food manufactured goods) inflation has remained strong printing in at 7.5% in July,2011 against 7.2% a month ago.

Given the RBI’s resolve to push inflation closer to its comfort zone of 5.0-5.5% and its effort to compensate for the lack of adequate policy responses in terms of adequate fiscal consolidation and easing supply bottlenecks we believe that the central bank is still some way off from pausing its rate hiking cycle. But how much more tightening is still left in the pipeline?

2.       Industrial growth likely to drag GDP growth lower but a complete collapse is unlikely

v  Interest rate sensitive segments such as car sales and consumer durable production have already been impacted by the configuration of higher interest rates and inflation and our sense is that more stress is likely in these segments.

v  Consumer durables growth in Q1FY12 fell to a mere 3.3% from over 15% a quarter ago and over 20% a year ago while domestic car sales growth in July contracted for the first time since Januaury,2009 recording a growth rate of -16%.

v  Apart from the obvious impact of higher interest rates on leveraged consumption there is also likely to be an inadvertent dampening in investments. We had initially anticipated a turn in the investment cycle by September, 2011 as tight capacities. However a more aggressive monetary policy stance is likely to now delay this till Q4FY12 when inflation stabilizes and the RBI pauses its rate hiking cycle.

Along with normalizing export growth, sequential momentum in industrial growth is therefore likely to remain subdued for a little while longer bringing FY12 industrial growth to 6.5%-lower than our initial projection of 7.5%.

So the big question is:

 Is current moderation in growth from last year’s level of 8.5% as a necessary re-adjustment for higher, more sustainable growth in the medium-term rather than the beginning of a deeper and protracted slowdown?

According to some experts:

Deceleration in growth : “soft patch” – perhaps exaggerated by Unfavourable external environment and largely a result of tighter domestic interest rates and policy design.

The following factors are believed to cushion both the headline and industrial growth going forward :

v  Effective interest costs likely to be lowered by external funding: A vast number of corporates have started tapping into external funding with global interest rates likely to remain low for some time to come. ECB inflows in 2010-11 were close to USD 23 bn against 15 bn a year ago while short-term trade credit saw net inflows of USD 11 bn against USD 7.5 bn a year ago. The likelihood of global liquidity conditions remaining easy means that external borrowings are likely to remain high in the near-term. The upshot is that the “effective” interest cost of most corporates is significantly lower than that implied by domestic lending rates alone and that debt servicing costs are not as onerous as meets the eye.

v  Problems remain in infrastructure but there is a silver lining: Infrastructure investment is undoubtedly under a fair bit of pressure with some of the traction made in dispensing the so called “policy paralysis” at the outset of the financial year running out of steam and issues such as those relating to land acquisition still unresolved. However, it may be incorrect to view all the sectors that comprise “infrastructure” as one.For instance, while power is facing problems such as raw material shortage and recovery of receipts roads and highways has seen considerable movement. 59 projects worth Rs 60,000 cr are likely to be announced by the government in FY12, 10 of which have already been awarded and this is likely to impact on domestic investment momentum.

v  FDI inflows could have positive knock-on effects: Further, there has been a turnaround in FDI inflows and this is likely to be positive for domestic investment. FDI inflows during April-June, 2011 more than doubled to USD 13.4 bn and expectations are that FY12 could see total inflows scale USD 35 bn.

v  Structural support from rural consumption: Lastly, and perhaps more importantly, it is difficult to discount the support that is likely to come from rural consumption-partly aided by income support schemes such as the NREGA and partly by gains from increasing product penetration. On the whole, this is likely to keep the trend growth rate intact creating a floor under near-term cyclical pressures to growth and keeping medium-term growth prospects intact.

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From now on, the SPeconomics Online edition will be updated as soon as something interesting is reported.
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Link: SPeconomics Vol-1 Issue-2