Emerging Economy

Indicus Analytics
September, 2008

5 September 2008
Indian Economy Next Quarter

Festival season arrives a tad early – growth rate to be maintained at about 8%

Crude prices down to sub USD 110 for now – but volatility to continue
Reforms back on the agenda so sentiment boosted
Rupee depreciation has set in
Long term growth and prospects bettered with reforms
Inflationary conditions to continue - relief from double digits a while away

India : Kal, aaj aur kal

The festive season has arrived. Crude is down, gold is down, monsoon has been good in north India and
the growth numbers for Q1 show that the economy hasn’t been as badly hit by rising interest rates as feared
before. Construction and services sectors continue to do well. Infrastructure sectors show stress points on
crude and refinery output, coal, cement and steel sectors have slowed down but not significantly in Q1.

But the impact of interest rate hikes, power problems and inflation has seriously affected the overall
manufacturing sector. There is a manufacturing growth slowdown but greater rural and government sector
incomes may very well pull it back up in the short run. So this year would not be too bad and the slowdown
in this sector should turn around by the last quarter of this year. On the agricultural front, rains have been
good in north and east India and the retreating monsoon is providing much needed succour to west and
south. Government procurement of wheat, rice etc. has been good. Food prices are therefore expected to
stabilize soon.

Reforms have made a somewhat of a comeback with a new and improved unshackled PM. Expect some
privatization in the next few months as that will also remove some liquidity from the system.

So rejoice, but with caution. The international economy is slowing down rapidly. Government finances are in
a mess (though the books do not show it). Hidden subsidies, public sector losses, and many pre-committed
expenditure items, are not helping. The Indian economy no longer has the strength that only comes with
conservative budgeting. Hopefully for another year or two the external environment will be good to us. But
even then India is on a long term inflation path of 6-8%, and that is not good for any economy

Bihar floods will impact agriculture growth as well. Bihar contributes on an average 4% of India’s agricultural
GDP. The District Agriculture Output of India (an Indicus database) shows that significant paddy and wheat
production occurs in the flood affected districts. The stagnant flood waters are expected to seep in and
impact not just current but the Rabi crop as well. Effectively, somewhere around 1% of India’s agri GDP has
gone down the Kosi.

P.S. As the new Governor takes over we wonder… No doubt RBI needs to reform. If reforms within the RBI
were the key objective then should it not have been the Deputy Governor who so well understands the
internal dynamics within the RBI and is yet an outsider? If reforms in the ministry were the key objective
then should not the Finance Secretary stayed on to reform the Ministry’s functioning? We do need
transparency in regulator choice. And we need a clearly laid out rationale for such decisions. But given this
decision, we wish Mr. Subbarao the best. He has a tough job ahead.

Sumita Kale & Laveesh Bhandari

5th September 2008, Indicus Analytics
Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari is Director, Indicus Analytics. They can
be contacted at sumita@indicus.net & laveesh@indicus.net
 Economic Growth
GDP grew at 7.92% in 2008-09 Q1, agriculture with modest performance of 3%, construction and
services sectors have shown little moderation with growth at 11.4% and 10% respectively.
Sectors that have taken a hit with high interest rates, poor execution of projects and slow reforms are
manufacturing (5.6%) and electricity (2.6%).
Mining sector with 4.8% growth has bettered its low 1.7% growth in the same quarter for the previous
year.
ABN-AMRO PMI survey shows that in August the manufacturing sector output index has risen to a 2
month high over its low in June.
Electricity generation grew at a low 2.7% in August, compared to the 9.2% last year.
Telecom sector continued to boom – record 9.2 million in July, bringing teledensity to 29.08%. Wireline
subscriber base however is declining as people switch to mobiles.
In the period April- July, railway freight tonnes carried increased by 9.42%, compared to 5.93% growth
in the same period last year.
Domestic air passenger traffic dropped from 7.19 million in June 2007 to 6.92 in June 2008.
International passengers however increased from 2.3 million to 2.55 million for the same months.
Domestic cargo handled by air rose by 3.8% in June this year.
Inflation
Inflation has continued to be at high levels – 12.34% for provisional WPI for the week ending August
23rd , with high upward revisions in June data.

Consumer prices trended higher with CPI AL at 9.41% and CPI IW at 8.33% in July.

Price of crude has fallen for the first time in 8 months from an average of $133 in July to $113 in August.
On the NCDEX however, spot prices of agri commodities has been declining since the last week of July.

Read: Karat and stuck policy

Interest Rates
The 10 year benchmark gilt whose yield rose sharply from May to touch a peak of 9.46% in mid-July,
has since been trending down, though volatility is still high.
This has followed the steep fall in crude oil prices since July, but rising inflation numbers have kept the
rate yields still high.
Though rate cut expectations are all over the world, and Australia cut rates for the first time in 21 years,
India may be in a for a rate hike, depending on the stance taken by the new regime at RBI and the
inflation trend.
The US rates have been held low despite inflation worries, as credit crunch impact is a more significant
concern.
Read: Fed steps back from imaginary tightening ledge
Exchange Rates
Rupee which has been in the depreciating mode since May crossed 44 Rs to a dollar in August.

The dollar has seen a surge as Eurozone growth prospects grow dim.

Exports in July were 31.3% higher than levels last July in dollar terms, while in rupee terms they grew
by 39.1%.
Imports meanwhile rose by 48.1% in July in dollar terms and 56.9% in rupee terms.
Oil imports during July 2008 rose by 69.3% over last July while non-oil imports were up by 38.7% in
dollar terms.
Trade deficit for the period April-July stands at $41.2 billion, up from $ 27.35 billion in the same period
last year.

Read: Dollar bulls might just meet Godot this time