Emerging Economy February 2009 Indicus Analytics

Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
The Emerging
Economy
– Monthly Newsletter from
Indicus Analytics
7th February 2009
Highlights
• Monetary policy and fiscal policy on
hold, vote on account to give a boost
• Pressure to cut interest rates further
but RBI not showing much interest
• Rate cuts by RBI, if at all, only by March
• Manufacturing shows some recovery
but likely to be a short term blip
• Agri output likely to be hit by warm
temperatures
• Downturn hits hiring intentions, reverse
migration hits villages
• Exports head for further decline as
foreign markets shrink
• Firms look to domestic rural markets for
growth
India: Kal, aaj aur kal

Last month we wrote, it is time to get over

our collective pessimism, and get on with the
job. Companies like Hero Honda who have
gone in for rural markets have outshone
others who are still stuck on servicing
consumers who need loans. Auto sector
cleared five months inventory in December
and continued to do well in January primarily
due to price cuts and discounts. Telecom
continues to add more than 10 million
consumers on the network.
In times of slowdown, companies need to cut

prices and focus on areas where the demand
is. International demand growth will be
lacklustre at best and likely to be negative.
The slowdown will get worse if firms do not
respond – and that is where the uncertainty
in forecasting comes from.
Despite large uncleared inventories, and

missing buyers, the real-estate sector has not
really reduced its prices (minor 5 to 10% cuts
from astronomical peaks of the past will not
do). At the same time it is reeling under a
severe credit crunch. This crunch is then
being transferred in many different ways to
the upstream manufacturing and service
sector suppliers. Merely easing liquidity will
have little impact on the real-

estate/construction sectors.
Yes, it is better to take a hit and move-on

rather than make a profit on every single
sale. If prices do not respond to changing
conditions, markets are not working properly,
one way or another the government will need
to step in.
If the government responds as most

corporate sector economists want it to –
increase expenditures and reduce interest
rates – sure we may go back to high growth
for a while. But that would be a very short
term solution. This downturn is a signal to
(generally large) firms, that all is not well
with their decision-making and growth
strategies. Whatever the government does,
it should not distort this critical signal.
The vote-on-account is due on the 16th of

Februrary 2009. It is expected that further
tax breaks will be given. If the past is any
indication, these breaks will be very sector
specific. Construction, IT sector, automobile,
chemicals, textiles, financial, etc. These
sector specific stimuli have to be thrown in
the trash can. If tax breaks have to be given,
give it to everyone. Reduce service tax for
everyone, reduce income tax, reduce VAT.

But do not give sector specific advantages as
they are highly distortionary.
Yet the news is not all bad. The ABN-AMRO

PMI survey (which we find a better indicator
than the government’s own IIP index) has
shown a small rebound in prodution
worldwide in January. More interestingly,
Indian manufacturing has been the least hit
out of all countries surveyed.
For the year ahead, the RBI survey of

professional forecasters shows a wide range –
minimum of 3.9% and a maximum of 8%.
While our forecasts are more in the 7%
growth zone for the year ahead, the 4%
forecast is very much in the domain of the
possible. A drought, or sudden shocks from
the western financial world, or bad news from
India’s own unorganized sector could take it
down.
Sumita Kale and Laveesh Bhandari

7th February 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
• IIP for November showed a 2.4%

growth over the last year, in line with
the Indicus forecast of 2.9%.
Manufacturing grew by 2.4%, mining by
merely 0.5% and electricity by 3.1%.
• Electricity however performed worse in
January, generating only 1.38% more
power than the previous year.
• In December, infrastructure sectors
grew by 2.3%, compared to the 3.2%
clocked in previous year. Coal and
cement were the star performers at
9.4% and 11.6% growth respectively.
• While cement exports declined,
despatches for December grew by
12.11%.
• The auto sector has seen a fresh spurt,
with sales in December zooming to
clear five months of inventory. Retail
sales crossed 1.4 lakh vehicles, beating
the previous record of 1.31 lakh in
November 2007.
• January also saw good sales, when
Maruti reported its highest sales ever of
71,779 units, previous highest of

71,772 in March 2007 – focus on rural
sector has seen the boost for Honda
and Maruti, other auto majors have not
been so fortunate.
• ABN-AMRO PMI survey of 500 firms
showed that there was a slight rise in
the index for January, though the
results still showed a contraction.
• India incidentally has seen the least
contraction in the PMI across all the
countries surveyed by ABN-AMRO. See
reference below.
• 10.81 million wireless subscribers
added to the telecom market in
December, compared to 10.35 million
in November 08 and 8.17 million in
December 2007. Telecom density now
33.23%.
• Railway freight revenue has been
slowing down – 13.39% growth in April-
December compared to 14.35% in
April-November. Net tonne kilometres
also slowed down to 6.39% Apr-Dec
from 7.37% in Apr-Nov.
• While rabi crop sowing has been on
greater acreage than last year in most
crops, some crops like urad, groundnut,
safflower, sesamum have seen lower
acreage sown.
• Rise in January temperatures however

do not augur well for wheat crop, govt
has been worried on this score.
Read:
Rebound in PMI
Obama is Jamal
Inflation
• Consumer price rises have slowed

down, with the CPI AL and CPI IW
indices dropping in December, inflation
however stayed high at 11.14% and
9.7% respectively.
• Wholesale Price Index which had been
dropping since September, showed a
rise again in January. The drop from
double-digit inflation in October to
around 5.5% levels in January has
primarily been the result of fuel price
declines.
• Sugar, oil cakes and wheat are some
commodities whose prices have risen.

Food articles inflation stood at 11.17%
for the week ending January 17th,
compared to 2.27% a year ago.
• Crude oil output has been slashed in
January by OPEC, aiming to stem the
bleeding losses. India plans to move to

deregulate fuel prices, read link below
on the implications.
Read
Spell it out and stick with it
Interest Rates
• Indian bond yields have been choppy
since the middle of December, with the
10 year benchmark gilt hitting 5.0536
on 5th January and rising since then to
touch 6.2044 on 30th January.
• The new 10 year benchmark gilt 6.05%
paper maturing in 2019 has low
volumes so far.
• The RBI held rates steady in its January
end policy review, though it has given
all indications of further cuts if needed.
The liquidity generated with the
aggressive cuts in the last two months
need to filter through the system.
• Sharp differences in central bank
responses now emerge as economies
battle their own woes – Bank of
England will slash rates to boost an
economy that is slated to be the worst
performing economy in the world (IMF
sets growth at -2.8% in 2009-10), ECB
continues to be wary of reducing rates

to historic lows.
Read
Happy days are here again for the RBI
Bank of England to cut, ECB stands pat
Exchange Rates
• Exports in December fell by 1.1% in

dollar terms and grew by 22% in rupee
terms thanks to the depreciating rupee,
while imports rose by 8.8% in dollar
terms and by 34.2% in rupee terms.
• While oil imports fell by 30.9% in dollar
terms reflecting the fall in crude oil
prices, non-oil imports were 31.9%
higher in December compared to the
previous year, showing continued
domestic demand.
• Trade deficit for April-December was
estimated at US$ 93.8 billion, higher
than the US $ 59.98 billion for the same
period in the previous year.
• The rupee has been falling since the
low of 47.08 on 19th December to range
around 49 to a dollar by the end of
January, its movement taking cues
from the stock market.
Read
Keep trading
The coming trade wars

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Indicus Analytics, An Economics Research Firm

India: Kal, aaj aur kal

Last month we wrote, it is time to get over

In times of slowdown, companies need to cut

Despite large uncleared inventories, and

have little impact on the real-

Yes, it is better to take a hit and move-on

If the government responds as most

The vote-on-account is due on the 16th of

everyone, reduce income tax, reduce VAT.

Yet the news is not all bad. The ABN-AMRO

For the year ahead, the RBI survey of

Sumita Kale and Laveesh Bhandari

Analytics. They can be contacted at

• IIP for November showed a 2.4%

71,779 units, previous highest of

• Rise in January temperatures however

• Consumer price rises have slowed

commodities whose prices have risen.

bleeding losses. India plans to move to

continues to be wary of reducing rates

• Exports in December fell by 1.1% in

The coming trade wars

For query or placing orders on

Indicus Analytics Pvt. Ltd.

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