India Economic: Monthly Economic Report January 2008

India Economic: Monthly Economic Report January 2008

Summary

a)The Indian Economic growth story continues. As per the revised estimates released by the Central Statistical Organisation (CSO) India’s economy grew faster than previously estimated, at 9.6 per cent in 2006-07 and 9.4 per cent the year before.

b)The Prime Minister’s Economic Advisory Council lowered the 2007-08 GDP projection to 8.9 percent, a shade lower than the 9 percent growth forecasted earlier. Slower demand for consumer goods and tardy growth in the farm sectors are the main reasons for this.

c)Exports for the month of December 2007 witnessed a momentum despite the Rupee appreciation. While in dollar terms the merchandise exports grew by 16.04 percent, in rupee terms the export growth was a mere 2.54 percent.

d)Industrial growth plunged to 5.3 per cent in November 2007 as compared to 15.8 per cent growth registered in November 2006 reporting a 66.45 per cent decline in growth rate year-on-year.

e)Supply-side constraints led to a reduction in the growth rate in the index of six infrastructure industries in November 2007 to 5.3 per cent from 9.6 per cent a year ago. This is the second month in a row in which core sector growth has nearly halved over the previous year.

f)Indian stock markets were hit by fears of a US recession. The rate cut by US Fed failed to bring cheer to the markets, and they remain highly volatile.

g)Though the fuel price pass through is yet to happen inflationary pressures are being felt in the Indian economy. The WPI (Wholesale Price Index) measure of inflation, which was 3.57 percent in December 2007, rose to a monthly average of 3.85 percent in January 2008.

h)On the policy side, the Indian Cabinet approved the FDI (Foreign Direct Investment) review that was pending for the last couple of months. The review is about the increase in FDI cap in various sectors of the Indian Economy.

Detail

Macro Economy

According to the revised estimates of CSO, Indian economy grew at 9.6 per cent in 2006-07 and 9.4 per cent the year. This is faster than the 9.4 percent and 9.2 percent estimated earlier for 2006-07 and 2005-06 respectively. The revised numbers put 2006-07 growth at the highest in 18 years. In 1988-89, the economy grew 10.5 per cent. With the latest revision, India’s economy grew at 7.76 per cent during the 10th Plan (2002-07), close to the targeted growth rate of 8 per cent. The Indian Finance Minister P Chidambaram said full-year growth in 2007-08 would be around 9 per cent. “It is a matter of considerable satisfaction that despite turbulence and heightened global uncertainties, our economy grew by 9.6 per cent in 2006-07 and is estimated to grow close to 9 per cent this year. Which side of 9 per cent it is difficult to say’’. The numbers come as a surprise to many and also justify the raising of rates by the RBI last time around.

Fine Tuning the Growth data: Quick Estimates (QE) vs. Revised Estimates (RE)

2005-06 / 2006-07
Industry / QE / RE / QE / RE
Agriculture, forestry & fishing / 6 / 5.9 / 2.7 / 3.8
Mining & quarrying / 3.6 / 4.9 / 5.1 / 5.7
Manufacturing / 9.1 / 9 / 12.3 / 12
Electricity, gas & water supply / 5.3 / 4.7 / 7.4 / 6
Construction / 14.2 / 16.5 / 10.7 / 12
Trade, hotels & restaurants / 10.4 / 9.4 / 13 / 8.5
Transport, storage &communication / NA* / 14.6 / NA* / 16.6
Financing, insurance, realestate & business services / 10.9 / 11.4 / 10.6 / 13.9
Community, social &personal services / 7.7 / 7.2 / 7.8 / 6.9
Total GDP / 9 / 9.4 / 9.4 / 9.6
*”Trade, hotels, transport & communication” was a single category earlier and has now been split into “Trade, hotels & restaurants” and “transport, storage & communication” category

The Prime Minister’s Economic Advisory Council (EAC) lowered GDP projection to 8.9%. They predicted that slower demand for consumer goods and tardy growth in the farm sector would pull down the growth rate of the economy to 8.5 per cent in 2008-09. The EAC also said that the country’s gross domestic product would be a “shade lower” in 2007-08 at 8.9 per cent, compared to its earlier projection of 9 per cent. This is largely on account of a slowdown in the industrial sector, which is expected to grow at 9.7 per cent as against 10.6 per cent projected earlier. EAC Chairman Dr C Rangarajan commented, “What made a difference in the performance of industrial sector is a lacklustre show by the consumer durables sector.” He also indicated that despite a strong rupee export growth in dollar terms remained robust at 22 percent. The EAC’s export target for 2007-08 is $156 billion exports, while the commerce ministry expects exports to be around $150 billion. The EAC also endorsed RBI’s efforts to moderate the impact of high capital inflows (expected to touch $103 billion this year) while suggesting that the only instrument left for use for the rest of the current financial year was dollar sterilisation.

Exports

Merchandise exports from India in December 2007 grew 16.04 per cent in dollar terms to $12.31 billion as against a growth of 14.95 per cent to $10.61 billion a year ago. The rise in export momentum came even as the rupee appreciated by more than 12 per cent last year. Trade analysts said exporters were trying to expedite the orders to lessen the impact of the rupee rise and fulfil Christmas demand in the western markets. This, they said, led to larger export volumes in October, November and December. The momentum in exports was mainly attributed to petroleum, gems and jewellery, and high-value engineering goods while, labour-intensive sectors like textiles and handicraft saw a dip in export value over the previous year. The export growth in rupee terms in December however saw a deep decline to 2.54 per cent as against 12.92 per cent a year ago. This was due to a lower realisation in rupee terms.

(in $billion) / Dec 2007 / Nov 2007 / Dec 2006 / YoY % change
Exports / 12.31 / 12.46 / 10.61 / 16.1
Imports / 17.68 / 19.83 / 14.98 / 18.1
Oil Imports / 5.96 / 5.82 / 4.82 / 23.8
Non -oil imports / 11.72 / 14.01 / 10.16 / 15.3
Trade Deficit / 5.37 / 7.41 / 4.36 / 22.9

Commerce Secretary G K Pillai commented that exports during 2007-08 would cross the $150-billion mark and might touch $155 billion as against the Commerce Ministry’s target of $160 billion. The likelihood of a moderation in export growth is due to a combination of factors such as the hit from the rupee appreciation and softening external demand. Strong domestic demand and high oil prices should, however, continue to boost import growth.

Industrial Production

The November 2007 Index of Industrial Production (IIP) numbers indicates a sharp dip in growth caused mainly due to lacklustre performance of the manufacturing and consumer sectors. Manufacturing dipped to 5.4 percent from a high of 17.2 percent in Nov. 06, while consumer durables slipped from 10.1 per cent in Nov 06 to a negative 4.1 per cent in Nov 07 and the consumer non-durables from 14.8 percent in Nov 06 to a negative 2.1 percent in Nov. 07.

During April-November ’07 Index of Industrial Production (IIP) registered 9.2 per cent growth as compared to the cumulative IIP of 10.9 per cent in April-November 2006. Power generation during April-November 2007 declined to 7 per cent from 7.3 per cent a year ago, while mining sector grew by 4.9 per cent against 4.2 per cent during the comparable periods. The growth rate in capital goods sector increased to 20.8 per cent in April-November current fiscal as against 17.4 per cent during the corresponding period last year.

This slowdown renewed demands from the Commerce Minister who called for loosening of monetary policy, which would stem rupee appreciation and benefit manufacturers. Acknowledging that a combination of rising interest rates and an appreciating rupee had triggered a slowdown in the economy the Prime Minister Manmohan Singh had constituted a committee to be headed by National Manufacturing Competitiveness Council Chairman V Krishnamurthy to devise strategies for reviving growth.

Core Sectors

Supply-side constraints halved the growth rate in the index of six infrastructure industries in November 2007 to 5.3 per cent from 9.6 per cent a year ago. This is the second month in a row in which core sector growth has nearly halved over the previous year. "Most of these industries like power and petroleum are hit by supply constraints." said India's Chief Statistician Pronab Sen. In the April to November period, the core sector index grew 6 per cent against 8.9 per cent in the same period of the previous year. Five of the six sectors in the index slowed coal being the only exception. The core sector index has a share of 26.7 per cent in the Index of Industrial Production (IIP). Experts say the sluggish performance of the index will impact IIP numbers going forward. "We expect IIP to grow by 7.3 per cent in November against 11.8 per cent a year ago," said Shubhada Rao, chief economist, Yes Bank.

CORE CONCERNS - Index of six infrastructure industries
Sector / Weight(%)
in IIP / Nov- 06 (%)growth / Nov -07 (%)growth /

Apr-Nov 06-07

(%) growth / Apr- Nov07-08
(%) growth
Crude Petroleum / 4.17 / 9.8 / 0.3 / 5.4 / 0.6
Refinery Products / 2 / 16.4 / 5.2 / 13.5 / 8.3
Coal / 3.22 / 4.9 / 7.7 / 4.8 / 4.3
Electricity / 10.18 / 8.8 / 5.8 / 7.3 / 7
Cement / 1.99 / 11.8 / 4.5 / 10.6 / 7.6
Finished Steel (carbon) / 5.14 / 9.3 / 5.8 / 11.6 / 5.9
Overall / 26.7 / 9.6 / 5.3 / 8.9 / 6

Source: Commerce and industry ministry

Stock Markets

In January the Indian Stock Markets tumbled under pressure as the Mumbai Stock Exchange Index (SENSEX) fell from a high of 21000 points (on 11th January) to below 17500 points (on 21st January). The market weakened following reports of a sluggish trend in international markets due to rising concerns of recession in the world's biggest economy, the US. Pressure grew due to the triggering of margin calls as traders/institutional investors started unwinding their positions. The markets though have now to some extent recovered (mainly thanks to some aggressive government intervention).

In the last 51 months, there was more than USD 49 billion of FII investment the Indian stocks compared to the USD 25 billion of foreign direct investment (FDI) during the same period. Between January and November 2007 foreign funds bought Indian shares worth 19 billion dollars, which is significantly ahead of the full-year record of about 11 billion dollars (in previous calendar year). During this period the Indian stock market, represented by SENSEX, grew by 290 per cent, with the SENSEX PE at 22.4. After the correction the PE stood at 17. The central bank has time and again cautioned against overheating in the capital markets and real estate sectors.

Inflation

The RBI did not cut interest rates despite signals from most of developed economies. It cited the high growth of the economy and inflationary pressures as the reasons for the status quo on interest rates. Inflation in India measured in WPI terms was gradually increasing. This was because of the increase in commodity/food prices. The government has been mulling over a price hike in the fuel prices for sometime but without success because of persistent Left parties’ opposition. The last time the fuel prices were hiked in India was when the international crude prices were at USD 57 per barrel. An increase in fuel prices would have a cascading effect on inflation.

FDI Review

The Government of India on the 30th January relaxed FDI in 6 sectors. This bold move aimed at attracting foreign capital in its fast-expanding economy comes in the face of strong opposition from its Communist (Left) allies and that too in a year when almost 10 state’s go for their elections. The decision, taken at a meeting of the Union cabinet, eases foreign investment norms in cargo and charter airlines, helicopter services, credit information companies, titanium mining, industrial parks and construction development projects, where foreign investors—both partners and financial—are permitted with equity caps ranging from 0% to 49%.

FDI limits

Existing limit (%) / Revised limit (%)
Petroleum refining / 26 / 49
Cargo airlines / 49 / 74
Aircraft maintenance/pilot training / 49 / 100
Commodity exchanges / - / 49
Credit information companies / - / 49
Titanium mining / - / 100

Business Chambers applauded the move while analysts felt that the move would help the respective sectors get not only the funds, but technological knowledge, further boosting growth in these sectors.

D J Rao/Akansha Bhushan

Economic Section

British High Commission

New Delhi