Economy Watch for 2009

India Notes

Economy

Growth estimates for India in CY09 have been revised to 4.5% by IMF from 5.1% projected in January however the Indian government still maintains its 6.1% growth projections. As per IMF, the slowdown in India is primarily a result of weaker investment, reflecting tighter financing conditions and a turn in the domestic credit cycle. Nevertheless, the downward revision in case of India (and China) is much less compared with most developed countries and several Asian peers, reflecting the large domestic market in these countries.

However, many indicators from independent sources, investments that refuse to flag, rejuvenated hiring, sprightly freight movement at major ports and robust data from key manufacturing segments indicate that the downturn has bottomed out and that the economy is poised to regain its vigour.

Nomura’s Composite Leading Index (CLI), UBS’ Lead Economic Indicator (LEI) and ABN Amro’s Purchasing Managers’ Index (PMI) all point to a pick-up in growth soon. And CMIE’s capex database, which tracks investments by companies, shows no significant slowdown in this space.

Token cuts for key policy rates; CRR and SLR unchanged

In the Annual Policy Review for FY10, RBI cut key policy rates (repo and reverse repo) by 25bps each with immediate effect. The repo and reverse repo rates now stand at 4.75% and 3.25%, respectively. CRR and SLR, however, remain unchanged at 5.0% and 24.0%, respectively. The current move is more of a signal from the central bank indicating that it accords priority to supporting growth and is, thus, committed to a softer interest rate regime.

After the large cut in policy rates since October 2008 (400bps for repo and 250bps already for reverse repo), the current 25bps cut in policy rates is unlikely to have any material impact on the overall liquidity condition. However, the current move is more of a signal from the central bank indicating that currently it accords priority to supporting growth and is, thus, committed to a softer interest rate regime. Analysts believe, the likelihood of continued slowdown in the real economy may induce RBI to cut repo and reverse repo rates further by up to 25bps each over the next three months.

Economy & Markets

India: Real activity subdued; RBI projects ~6% growth for FY10: India’s real GDP growth during Q3FY2008-2009* came in at 5.3% Y-o-Y, the lowest since Q4FY2002-2003. The sharp fall in overall GDP was driven almost entirely by the 2.2% Y-o-Y decline in agriculture and allied activities in Q3FY2008-2009. The Index of Industrial Production (IIP) during February 2009 declined 1.2% Y-o-Y. This number puts the FY09 April-February number at 2.8% vis-à-vis 8.7% in FY2007-2008. Analysts believe IIP growth for FY2008-2009 is likely to remain at ~2.5%. RBI has kept its growth forecasts for FY10 at ~6.0% and has implicitly assumed normal monsoon for the year. It has also expressed its assumption of economic activity stabilising to some extent on the back of fast correction in commodity prices along with the stimulus packages introduced since H2FY2008-2009.

* FY refers to financial year in India which starts from 1st April 2008 to 31st March 2009.

Indian Meterological Department forecasts normal monsoon; inflation in India set to turn negative: IMD, in mid April 2009, issued the first long-range forecast for rainfall in the South-West monsoon season (June-September). It says that the rainfall for the country as a whole in the said period is likely to be near normal. Quantitatively, monsoon season rainfall is likely to be 96% of the long period average with a model error of ± 5%. With rapid correction in commodity prices, both in international and domestic markets, inflation expectations have come down significantly. Base effects for WPI inflation are also likely to remain markedly favourable in the coming months. WPI inflation (Y-o-Y) is all set to fall below zero and will be in the negative zone Q1FY2009-2010 onwards.

But India is still buying

Telephony creates new records: Total 15.87 million telephone connections (Wireline and Wireless) have been added during March 2009 as compared to 13.82 million connections added in February 2009. The total number of telephone connections reaches 429.72 million at the end of March 2009 as compared to 413.85 million in February 2009. With this growth, the overall tele-density has reached 36.98 at the end of March 2009 as against 35.65 in February 2009. The total wireless subscribers base stood at 391.76 million at the end of March 2009. A total of 15.64 million wireless subscribers have been added during the month of March 2009 as against 13.82 million wireless subscribers added during the month of February 2009. Indian subscriber addition dwarfs China’s as China adds 4 million subscribers per month. At this rate it is only a matter of few years for India to become the biggest telecom market. India already is the fastest growing telecom market.

Robust growth in auto sales for fifth straight month: Car and two-wheeler sales saw the fifth straight month of growth in April, strong evidence that the recovery was no flash in the pan and providing increasingly rare good news for a sector reeling under the threat of global bankruptcies. Last month saw market leaders such as Maruti Suzuki, Hyundai Motors, Mahindra & Mahindra and Honda Siel better their performance over the corresponding month of the previous year, helped by the government’s stimulus packages, cuts in lending rates and as elections boosted demand for vehicles, especially jeeps and SUVs. Maruti Suzuki, which makes every second car sold in India did particularly well, with a 9% year-on-year growth in April, while close competitor Hyundai Motors sold 4% more this year. Mahindra & Mahindra (M&M), with its array of SUVs and mini-trucks, saw sales jump 36%, as elections boosted demand for its products tailor-made for the rough terrain of rural India.

Preliminary Indicators turn Positive

Nomura’s Composite Leading Index (CLI), UBS’ Lead Economic Indicator (LEI) and ABN Amro’s Purchasing Managers’ Index (PMI) all point to a pick-up in growth soon and CMIE’s capex database, which tracks investments by companies, shows no big slowdown in this space. A lead indicator is a composite of a variety of indices that track activity in vital economic sectors. Nomura’s composite leading index (CLI)—used to identify the turning points in the growth rate cycle—rose in the first quarter of 2009 after four consecutive quarterly falls. The CLI indicates a turnaround in non-agricultural GDP growth rate with a two quarter lead time, the pick-up in the first quarter of 2009 hints at a recovery from the month of June.

After rising for three successive months, UBS’ LEI index for India now stands at 2.1; it touched a low of -2.08 last December. The LEI is a composite indicator of variables like government bond yields, M1 money supply, currency risk premium, foreign exchange reserves and stock market gains

Source: Crisil Research