Current state of Indian Economy August 2010

Highlights – August 2010
July 2010 overall industrial growth numbers continued on the path of buoyancy. The high growth in the overall industrial output was solely on account of the heavyweight manufacturing sector. The other two sectors also remained in the positive zone in

July and during the period from April – July 2010. However, the growth in output was lower than the growth seen in the corresponding period of previous year (FY10). Going by the use-based classification we see a huge rise in the production of capital goods which rose by 63 percent in July 2010 as compared to the rise of 1.7 percent in the same month of previous year. The growth in the consumer goods output swelled only on account the durables segment.

The industry segments that registered a sizable increase in output were food products, cotton textiles, jute products, paper products , rubber and plastic products, petroleum , coal and tar, metal products and among the capital goods were the machinery and equipment , transport equipment and parts.
The growth momentum of the six core infrastructure industries was maintained with the increase in petroleum products ( crude petroleum and petroleum refinery). Production in coal and power remained positive, however, the growth numbers were not higher than the previous year. The two segments that were found in the negative territory were cement and finished steel.

The moderation in overall inflation could be observed in July 2010, 10 percent in July from 11 percent in the previous month. However, inflation was found to be much higher when compared with the inflation recorded in July last year and may require more time and steps by the government to cool down to targeted levels. The prices of items / article groups that fueled the overall price to rise to such levels were the food and non-food articles (primary goods), fuel products, beverages, textiles, wood, rubber, chemicals , basic metals , machinery and transport equipments.

The broad money supply rose by 3.4 percent over the period from April to July 2010-11, this was lower than the M3 recorded in same period of previous year. The aggregate deposits was also seen to expand slowly by 3.3 percent during the period from April to July of the current fiscal as compared to the expansion of 6.2 percent during the same period of 2009-10. The bank credit rose by 3.5 percent calculated in July over April 2010.
The total revenue of the government stepped up sharply this year with more than twofold increase, from the Rs 105378 crores up to July 2009-10 to Rs 238524 crores up to the month of
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July of current fiscal . Consequently, the magnitude of fiscal deficit has contracted by almost 43 percent during this period of 2010-11 over the previous year.
According to RBI, government acquired higher than anticipated revenue in July from the auction of 3G and BWG and revenue from taxes helped the holding back of fiscal deficit within the targeted level of 5.5 %.

The buoyancy in tax collection in July has been on account of impressive collection in the direct and indirect taxes. However, in growth terms the indirect tax was observed to be much higher as compared to the growth in direct taxes.

The indices continue to swing between 16 K to 17K points. In July 2010 it rose to the level of 17.5 K points and currently in September 2010 we saw the Indian stock market rise to the level of 20 K points again.
The overall merchandise exports slowed to 13 percent in the fourth month ( July) of the present fiscal as compared to the 30 plus percent growth registered in the previous month of this year. It is early for any comment on the trend without the trade numbers of August and September.

The total foreign investment swelled to 10.8 billion up to July on the back of inflows in the portfolio investment category. High investment activity by the FIIs was witnessed during the month, this high inflows is what has led to increased portfolio investments ( USD 9.1 billion). FDI received during the month was only USD 1.7 billion .
Further increase in the forex reserves has been witnessed; this has been observed to rise from USD 275 billion to USD 284 billion and enough to cover 11 months of imports.

ADB hikes GDP forecast to 8.5% but warns about inflation

The Asian Development Bank (ADB) raised India’s growth forecast for the current fiscal to 8.5 per cent from 8.2 per cent but expressed concern over persistent high inflation and rising value of rupee which could undermine future economic expansion.

“Growth is being supported by robust investment, increased capital inflows, and stronger industrial output, buoyed by rising consumer demand,” said ADB Outlook Update.

The multilateral lending agency had projected a growth rate of 8.2 per cent for 2010-11 in April. For the next financial year (2011-12), ADB has retained its earlier projection of 8.7 per cent.

ADB’s growth projection for current fiscal is the same as had been forecast by the Finance Ministry, the Reserve Bank of India and the Prime Minister’s Economic Advisory Council.

The multilateral lending agency, however, expects the average inflation to be 7.5 per cent during the current fiscal as against its earlier projection of 5.5 per cent. “High food prices (will) remain a near-term concern”, it added.

The rate of price rise, according to ADB, is likely to be at the same level during the next fiscal. The inflation, according to the new Wholesale Price Index with base year 2004-05 was 8.5 per cent in August and food inflation was 15.10 per cent for week ended September 4.

ADB also warned that the raising value of rupee does not augur well for the Indian economy in the coming years. Rupee appreciated more than 11 per cent in real terms between August 2009 and August 2010, it added, stating that this “poses an additional challenge for policy makers as they seek to maintain high growth while winding back the monetary and fiscal stimulus measures used to help the economy recover from the global economic crisis“.

High inflation and rupee’s sharp appreciation, it added, could erode India’s export competitiveness and its plans to further expand economic growth to 9-10 per cent in coming years.

Pointing out that RBI was projecting overall inflation to moderate to 6 per cent by March-end, the report said, “if price pressures do not abate as expected, the central bank will be hard pressed to intervene in the foreign exchange market to dampen rupee appreciation.”