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31 August 2011
For quite some time, economists and market pundits have been telling that the Indian economy is in a slowdown. This has now been confirmed by the latest figures of GDP released by the Government of India. As per the data released on 30 August 2011, the first quarter (April-June 2011) GDP growth rate has come down to 7.7 per cent as against 9.3 per cent in the corresponding quarter of last year. However, the growth rate of April-June 2010 quarter is revised down to 8.8 per cent from 9.3 per cent as per the new series of Index of Industrial Production (IIP) with 2004-05 as base year. What is noteworthy is that the quarterly growth rate has been on a downward spiral since April-June 2010 quarter as the RBI has been increasing interest rates since March 2010. It is now official that economic activity is slowing down. What is pulling down the economy is a sharp dip in the growth rate of construction sector to 1.2 per cent in the latest quarter compared to the 7.7 per cent growth rate in April-June 2010 quarter. Other sectors that have contributed to the lower economic activity are: Mining and quarrying: 1.8 % (7.4%); and Community, social & personal services: 5.6 % (8.2%). The sectors that are doing better are: Agriculture, forestry & fishing: 3.9 % (2.4%); and Electricity, gas & water supply: 7.9% (5.5%). (Figures in brackets are for April-June 2010 quarter). Policymakers are usually in the habit of talking up the economy. Of course, its their job! The cheerleaders say that the Indian economy will pick up pace in the second-half of the fiscal year. However, as is well known, empirical evidence suggests otherwise. In the last seven years, second-half growth rate is lower than that of first-half growth rate in five years. Equity markets have taken the GDP figures in their stride and the reaction is muted except for the negative effect on prices of Larsen & Toubro and others. Now, the markets are trying to guess what the RBI will do on September 16th when it meets for policy rate revision. There are two strong opinions about further rate hikes by RBI. One camp feels that RBI should not raise rates further as the economy is already slowing and the stubborn inflation is caused by supply-side factors and other factors not connected with monetary measures. The second viewpoint is that RBI will opt for a further 25 basis point (0.25%) increase as inflation is not showing any signs of cooling down. My guesstimate is that RBI will go for a Repo rate hike of 25 basis points on September 16th.
Notes: Q1 2011-12 figure is based on new IIP series 2004-05 and other quarters are based on old IIP series 1999-2000. Q1 1st quarter (Apr-Jun), Q2 2nd quarter (Jul-Sep), Q3 3rd quarter (Oct-Dec), and Q4 4th quarter (Jan-Mar). Source: CSO
5.00
5.25
5.50
5.75
6.00
6.25
6.50
6.75
7.25
27 Ju l. 1 0 17 Se p. 10 02 N ov .1 0 25 Ja n. 11 17 M ar .1 1 03 M ay .1 1 16 Ju n. 11
20 M ar .1 0 20 Ap r.1 0
03 Ju l. 1 0
Source: RBI
26 Ju l. 1 1
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Overheard!
(It is fashionable to convert everything into gold now)
A:
9.1 8.9
7.8 5.8
7.5
8.4
9.1
8.1
Notes: H1 - April-September, and H2 October to March. GDP at factor cost at constant prices (1999-2000) for years from 2004-05 to 2008-09 and for years 2009-10 & 2010-11, figures are GDP at factor cost at constant prices (2004-05). Source: CSO
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Notes: GDP at factor cost at constant prices (1999-2000) for years from 2004-05 to 2008-09 and for years 2009-10 & 2010-11 figures are at constant prices (2004-2005). These are as per old base year of IIP series 1999-2000. The growth rate for 2007-08 is revised up to 9.2% from 9.0% as per new IIP series 2004-05. CRISIL opines the GDP growth rate for 2010-11 may be revised upward to 8.9 per cent as the latest estimates.
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Brent crude oil price touched 2011-year high of $127 and Nymex crude $114 per barrel both during the second week of April 2011 and the prices have since cooled off. Now, Brent crude is quoting at $114 and Nymex crude at $88 per barrel. There are concerns about Indias fiscal deficit going out of hand. The effect of interest rate hikes is usually felt with a time lag of one to two years and their full impact is yet to be felt in the economy. The progress of monsoon till August is fairly good. Exports growth in the last three quarters is quite robust though imports too are growing at a strong pace. In toto, the signals are a bit mixed. Against this scenario, will RBI raise interest rates further? It is a difficult question to answer. However, if one goes by the RBIs moves in the last few years, one may come to a conclusion on this issue. Let us go back a little to understand RBIs moves. When RBI started raising interest rates in March 2010, it said its measures were baby steps in order to keep growth prospects intact. It was trying to maintain a balance between growth and inflation. At that time, the expectation of the RBI was that inflation would come down by November/December 2010. RBI continued its dovish monetary policy till December 2010 by raising Repo rate by small measures of 25-basis points each. But, economies have a habit of tossing up surprises and we need to expect the unexpected. RBIs expectations about inflation proved wrong as inflation (RBI uses wholesale price inflation index WPI for inflation management) did not show any signs of relenting even after December 2010. During the early part of this calendar year (2011), RBI changed its dovish stance and turned hawkish. And it started raising rates more aggressively. During the first seven months of this calendar year, RBI has raised interest rates by 175 basis points or 1.75 per cent. Even though global developments in the form of sovereign debt crisis in Europe and downgrading of USs credit rating have turned negative, RBI would find it difficult to take any drastic steps and change its hawkish stance toward interest rates. RBI may opt for some kind of consistency in its approach toward monetary policy. Until headline inflation shows clear and sustainable signs of deceleration, RBI may not change its current stance and may opt for a 25-bp rate hike on September 16th giving some indications of interest rates peaking and this view is subject to one condition that there wont be any nasty surprises in eurozone or in other countries.
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Rama Krishna Vadlamudi, HYDERABAD 31 August 2011 www.scribd.com/vrk100 MY BLOG: www.ramakrishnavadlamudi.blogspot.com Some Terms Explained
1. GDP at factor cost: GDP at factor cost is calculated as the total of all the eight sectors, namely:
1. 2. 3. 4. 5. 6. 7. 8. Agriculture, forestry & fishing Mining & quarrying Manufacturing Electricity, gas & water supply Construction Trade, hotels, transport & communication Financing, insurance, real estate & bus. sers Community, social & personal services Broad classification of GDP at factor cost is as follows: I. Agriculture : Item 1 above II. Industry : Aggregate of items 2, 3 & 4 III. Services : Aggregate of items 5, 6, 7 & 8
2. GDP at market prices: GDP at market prices is the sum of the gross values added of all resident producers
at producers prices, plus taxes less subsides on imports, plus all non-deductible VAT (or similar taxes). GDP at market prices is equal to GDP at factor cost (as per 1 one above) plus taxes minus subsidies. It can also be calculated by adding PFCE, GFCE, GCF and exports and reducing imports PFCE Private final consumption expenditure is expenditure incurred for consumption of food, beverages, tobacco, gross rent, fuel & power, clothing & footwear, furniture & appliances, medical & health services, transport & communication, recreation, education and others. GFCE - Government final consumption expenditure consists of expenditure incurred by the government on both individual consumption goods and services and collective consumption services. Gross Capital Formation (GCF) refers to the aggregate of gross additions to fixed assets (fixed capital formation), increase in stocks of inventories or change in stocks (CIS) and valuables. (GCF = GFCF + CIS + valuables) Gross fixed capital formation (GFCF) is a measure of total investments made in the economy. It is measured by the total value of all fixed assets acquired less disposals, plus certain additions.
Notes:
The estimates of Quarterly GDP have been compiled by CSO using the new series of Index of Industrial Production (IIP). The new series of IIP with base 2004-05 was released by CSO on 10th June, 2011. The new series of IIP is based on a representative item basket comprising 682 individual items.
Abbreviations: CRISIL Credit rating agency, CSO Central Statistics Office (formerly known as
Central Statistical Organisation), GDP Gross Domestic Product that is national income, IIP Index of Industrial Production, LAF liquidity adjustment facility of the RBI, RBI Reserve Bank of India, and US United States. Disclaimer: The authors views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. Investors need to consult their certified financial adviser before making any investment decisions. For authors articles on financial markets, just click: www.scribd.com/vrk100 www.ramakrishnavadlamudi.blogspot.com
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