India's growth not all shine

[ajtr]

India's growth not all shine​

By Kunal Kumar Kundu

BANGALORE - India's gross domestic product (GDP) figures for the second quarter of its fiscal year surprised on the upside as year-on-year growth was pegged at 8.9%. While the numbers are confidence boosting, it is important to realize that there is a statistical element to the latest number, while being very positive, rather than the data indicating a substantial improvement in actual performance.

Readers may recall that very recently India revised the way official inflation, as measured by the Wholesale Price Index (WPI), is calculated. Under the new methodology, inflation turns out to be
lower than what it would have been under the old methodology. This adds a positive deflator effect to the final GDP numbers.

In fact, the press release of the Ministry of Statistics & Programme Implementation (MOSPI) shows that the year-on-year (YoY) GDP growth in the fiscal first quarter has also been revised upward (from 8.8% to 8.9%), and that is because of the deflator effect. Nevertheless, the deflator effect is not very high. The bigger reason is quality of data dished out by the government.

After the Q1 numbers were released on August 30, a hue and cry was raised by economists (yours truly included) on the quality of the number given by the government. While the GDP growth at factor cost (read production or income side) was up by 8.8%, GDP growth at market price (read expenditure or demand side) was up by a mere 3.7% - the second-lowest growth recorded under the new series. That raised questions about the authenticity of the data itself.

Not only was the divergence of GDP growth under the two methods of accounting more than 5% (an unprecedented event), it was clear that domestic demand was faltering since the demand-side GDP was hardly budging. In such a scenario, it was difficult to comprehend why production was cranking up in the absence of demand.

The next day, the government acknowledged that their number was incorrect and that they had used a wrong deflator. As a result, Q1 GDP by expenditure side was revised upward substantially to a YoY growth of 10.3%. Within that, growth in Private Final Consumption Expenditure (PFCE) or private expenditure (read consumer demand) was also revised upward - from the original growth rate of a mere 0.34% YoY to a revised rate of a very healthy 7.8% YoY.

It is important to note here that consumption expenditures account for more than 55% of India's GDP. Hence, a slowdown in consumer demand (as was reflected by the data) should have been a major concern. Which was why I was of the opinion that the annual GDP growth rate would struggle to touch 8%. Clearly, a wrong data set can lead to erroneous conclusions. In fact, the following chart makes for interesting reading.

As can be seen, the initial data released on August 30 was substantially understated as compared to the revised data released on September 1 and November 30.

Now, assuming that the latest set of data is correct, there is increased evidence that demand is better than what had been assumed earlier and is actually holding up nicely. Hence, the 8.9% growth is understandable.

Under this circumstance, I am revising my growth forecast for the full fiscal year upward to between 8.5% and 8.7%. While agriculture growth is expected to hold on given the low base effect, I am expecting the industry to slow down during the next two quarters.

Although the recently released Index of Industrial Production data for October (showing a YoY growth of 10.76%, after being in low single digits in the previous two months) buoyed the market, October is India's most important festival month, the cranking up of production is not surprising. However, the underlying weakness is quite evident. The three-month moving average (3MMA) data indicates a clear slowdown since February last.

What is more worrying is the fall in capital goods production. Although it recorded double digit growth in October, it was the lowest double digit growth in more than a year.

In this regard, it is also important to note that inflation in India is likely to remain at elevated levels (given the historical under investment in the agriculture sector and high levels of commodity prices including that of oil) this year. With domestic demand showing strength (which is partly explained by preponement of demand given the expectation of interest rate hikes), the Reserve Bank of India (RBI) will have no other option but to raise interest rates to cool inflation. Elevated levels of inflation and high interest rates will act as a dampener for domestic demand going forward.

On a medium- to long-term basis, India's growth outlook remains strong and is likely to hover between 8 and 9%, mainly driven by relentless surge of urbanization, the demands of a young population and the increasing number of people (read consumers) moving to the medium and high income brackets.

Kunal Kumar Kundu is Senior Practice Lead, Knowledge Services Division, Infosys Technologies Ltd. The views are those of the author, whose website is Kunal's thoughts - Home

 

[ajtr]

Indian inflation waiting to strike​

By Kunal Kumar Kundu

BANGALORE - The Reserve Bank of India (RBI) during its monetary policy review this month kept its key interest rate unchanged, much to the relief of market participants. While the expectation was for a rate increase, the softening of the inflation number (as shown by the wholesale price index, or WPI) just prior to the policy review raised hopes of the status quo being maintained. The RBI obliged.

The relief was palpable, given that the RBI remains one of the most hawkish central banks in Asia with six successive rate increases from March this year. This pause comes after the RBI increased the lending (or repo) rate by 1.5 percentage points to 6.25% and the reverse repo by 2 percentage points to 5.25%4

While growth concerns took precedence over inflationary risk, aided by the drop in year-on-year inflation to 7.48% in November from 8.58% in October, the RBI kept its tone quite hawkish and has left the door open for further rate increases next time round. Clearly, the RBI is not very comfortable with the inflation outlook, and rightly so. I believe inflation is likely to be a bigger worry next year than is the general perception.

To understand this, consider three important factors - agriculture production, commodity prices and capital inflows.

Agriculture
The Indian agriculture sector has historically remained one of the most under-invested sectors and this is coming back to haunt the country. Not surprisingly, for the past two decades, India's foodgrain production has lagged behind the population growth rate.

In the decade of the 1980s, the population grew at a compounded annual growth rate (CAGR) of 2.1%, while foodgrain production rose by 3.1% CAGR. Thereafter, the growth rate of foodgrain production slowed down considerably, so much so that during the current decade (till financial year 2009-2010), the growth rate of foodgrain production was way below that of population increase.

Monsoon failures were a contributing factor this decade, helping to lead to a 19.2% shortfall in rainfall (compared with normal years) in 2002-03, a 13.8% shortfall in 2004-05 and a 29.2% shortfall during 2009-10. This not only indicates India's inability to reduce dependence on the monsoon (mainly because of a lack of adequate investment in irrigational infrastructure) but also an inability to increase productivity of foodgrain (again because of inadequate investment).

According to RBI data, while CAGR of foodgrain (kg/hectare) productivity peaked at 4.41% in the 1980s, it started to slide ominously thereafter. The growth rate fell to 2.36% in the 1990s, and to 1.06% during the first eight years of the current decade.

Not surprisingly, food inflation in India continues to remain inordinately high. After briefly flirting with a single digit rate (a high one at that), it is inching back toward the double digits (rising to 9.46% year-on-year in the week ended December 4 from 8.60% the previous week. Available indications are that food inflation will comfortably cross the double digit mark sooner rather than later.

Commodity prices
To my understanding, the biggest inflation risk is in high commodity prices, which are expected to remain at an elevated level going forward. There are two important drivers for these - economic activity and investment activity.

Although the developed world is floundering, the onus of keeping global activity at a decent level lies squarely on the shoulders of emerging economies.

With the emerging economies being much more commodity intensive, the demand for commodities is expected to remain strong.

Another important driver of commodity prices is the increasing importance of commodities as an asset class. Against the background of the financial turmoil in 2008, commodity prices have corrected sharply. One of the biggest corrections has been observed in the oil price. After reaching a record high in July 2008 at US$147, it plummeted nearly 80% to touch US$32 within just five months. On a broader basis, the CRB Commodity Index, one of the most recognized indices to track commodity prices, has also experienced a significant loss since peaking in July 2008.

The main reasons for the sharp correction were global recession, a stronger dollar and rising risk aversion among financial investors. However, commodities have come back strongly on the back of strong growth, shown by the emerging market economies as well as increased flows of investment into commodities.

Among the various asset classes, currency is losing its sheen since there is a real threat of currency debasement, what with the developed economies experiencing high deficits and hoping to devalue their way out of their debt problems. Even the debt issuances of the developed economies, especially in Europe, are now looked at with suspicion as fears of default loom large.

The recent increase in the yield of US Treasuries reflects that investors' concerns are leading to lower demand. Real estate, as an asset class, is now hardly, if at all, attractive. Not surprisingly, therefore, commodities are back in favor.

While earlier investors could only take part in the commodity play either by owning shares of commodity companies or through physically owning some assets, the emergence of commodity index products and exchange traded funds (ETFs) including exchange traded commodities over the past few years has increased the popularity of commodities among investors. ETF Securities Ltd, a pioneer in exchange traded commodities has, for example, seen its assets under management (AUM) in only their physical gold and silver shares jump in a little more than a year to more than US$1.6 billion currently, from a mere $100 million in September 09.

ETF Securities recently launched similar funds holding copper, nickel and tin. Other exchange traded products (ETPs) backed by aluminum, lead and zinc will be introduced next year. ETF Securities, JPMorgan Chase & Co and BlackRock Inc have all announced plans to start such funds. According to available information, gold-backed ETPs accumulated 2,099 tonnes of bullion since they started in 2003, equal to nine years of US mine output. According to Barclays Capital, commodity assets under management rose $19 billion to a record $340 billion in October. It is also important to note here that commodities are an important hedge against inflation.

Indian prices of such industrial metals have also risen in sync with the global prices.

This is creeping into domestic inflation. India's automakers have already announced price increases, as has been the case with prices of many fast-moving consumer goods. Domestic prices of petrol and diesel have been raised again as global oil prices threaten to breach the $100 mark. This will again feed into inflation.

It is also important to note in this connection that the days of cheap oil are over. Oil exploration has now become a much more costly affair as more prospecting takes place further offshore. As a result, oil prices are unlikely to return to former lows even if economic activity weakens.

With such cost pressures building up, inflation in India will continue to remain at an elevated level. Unlike in the US, which is threatened by weak domestic demand, such demand in India is very strong. This, along with capacity constraints, means that the pricing power in India currently resides with producers. While capital investments have been taking place, new capacity will only come up after some gestation period. Until that time, producers will be able to pass on price increases as domestic demand stays firm.

Capital inflows
This is the third important source of inflation. As the Indian growth story remains strong, capital inflows will continue to be a major source of headaches for the RBI, particularly with the developed world economies continuing with their own brands of stimulus programs. Increased inflows of capital are forcing the RBI to intervene to prevent abrupt appreciation of the currency. As this increases, the money supply, inflation jacks up.

On the other hand, a rate increase to ward off inflation has the potential to increase capital inflows, adding to the dilemma. Although a high current account deficit (thanks mainly to India's over-dependence on imported oil) can help absorb the increasing inflows, given India's growth story, capital inflows will continue to be an important factor.

Overall, I am expecting inflation to be a major concern for India in 2011.

Kunal Kumar Kundu is Senior Practice Lead, Knowledge Services Division, Infosys Technologies Ltd. The views are those of the author, whose website is Kunal's thoughts - Home.

 

[indian_reality]

Indian inflation waiting to strike​

By Kunal Kumar Kundu

BANGALORE - The Reserve Bank of India (RBI) during its monetary policy review this month kept its key interest rate unchanged, much to the relief of market participants. While the expectation was for a rate increase, the softening of the inflation number (as shown by the wholesale price index, or WPI) just prior to the policy review raised hopes of the status quo being maintained. The RBI obliged.

The relief was palpable, given that the RBI remains one of the most hawkish central banks in Asia with six successive rate increases from March this year. This pause comes after the RBI increased the lending (or repo) rate by 1.5 percentage points to 6.25% and the reverse repo by 2 percentage points to 5.25%4

While growth concerns took precedence over inflationary risk, aided by the drop in year-on-year inflation to 7.48% in November from 8.58% in October, the RBI kept its tone quite hawkish and has left the door open for further rate increases next time round. Clearly, the RBI is not very comfortable with the inflation outlook, and rightly so. I believe inflation is likely to be a bigger worry next year than is the general perception.

To understand this, consider three important factors - agriculture production, commodity prices and capital inflows.

Agriculture
The Indian agriculture sector has historically remained one of the most under-invested sectors and this is coming back to haunt the country. Not surprisingly, for the past two decades, India's foodgrain production has lagged behind the population growth rate.

In the decade of the 1980s, the population grew at a compounded annual growth rate (CAGR) of 2.1%, while foodgrain production rose by 3.1% CAGR. Thereafter, the growth rate of foodgrain production slowed down considerably, so much so that during the current decade (till financial year 2009-2010), the growth rate of foodgrain production was way below that of population increase.

Monsoon failures were a contributing factor this decade, helping to lead to a 19.2% shortfall in rainfall (compared with normal years) in 2002-03, a 13.8% shortfall in 2004-05 and a 29.2% shortfall during 2009-10. This not only indicates India's inability to reduce dependence on the monsoon (mainly because of a lack of adequate investment in irrigational infrastructure) but also an inability to increase productivity of foodgrain (again because of inadequate investment).

According to RBI data, while CAGR of foodgrain (kg/hectare) productivity peaked at 4.41% in the 1980s, it started to slide ominously thereafter. The growth rate fell to 2.36% in the 1990s, and to 1.06% during the first eight years of the current decade.

Not surprisingly, food inflation in India continues to remain inordinately high. After briefly flirting with a single digit rate (a high one at that), it is inching back toward the double digits (rising to 9.46% year-on-year in the week ended December 4 from 8.60% the previous week. Available indications are that food inflation will comfortably cross the double digit mark sooner rather than later.

Commodity prices
To my understanding, the biggest inflation risk is in high commodity prices, which are expected to remain at an elevated level going forward. There are two important drivers for these - economic activity and investment activity.

Although the developed world is floundering, the onus of keeping global activity at a decent level lies squarely on the shoulders of emerging economies.

With the emerging economies being much more commodity intensive, the demand for commodities is expected to remain strong.

Another important driver of commodity prices is the increasing importance of commodities as an asset class. Against the background of the financial turmoil in 2008, commodity prices have corrected sharply. One of the biggest corrections has been observed in the oil price. After reaching a record high in July 2008 at US$147, it plummeted nearly 80% to touch US$32 within just five months. On a broader basis, the CRB Commodity Index, one of the most recognized indices to track commodity prices, has also experienced a significant loss since peaking in July 2008.

The main reasons for the sharp correction were global recession, a stronger dollar and rising risk aversion among financial investors. However, commodities have come back strongly on the back of strong growth, shown by the emerging market economies as well as increased flows of investment into commodities.

Among the various asset classes, currency is losing its sheen since there is a real threat of currency debasement, what with the developed economies experiencing high deficits and hoping to devalue their way out of their debt problems. Even the debt issuances of the developed economies, especially in Europe, are now looked at with suspicion as fears of default loom large.

The recent increase in the yield of US Treasuries reflects that investors' concerns are leading to lower demand. Real estate, as an asset class, is now hardly, if at all, attractive. Not surprisingly, therefore, commodities are back in favor.

While earlier investors could only take part in the commodity play either by owning shares of commodity companies or through physically owning some assets, the emergence of commodity index products and exchange traded funds (ETFs) including exchange traded commodities over the past few years has increased the popularity of commodities among investors. ETF Securities Ltd, a pioneer in exchange traded commodities has, for example, seen its assets under management (AUM) in only their physical gold and silver shares jump in a little more than a year to more than US$1.6 billion currently, from a mere $100 million in September 09.

ETF Securities recently launched similar funds holding copper, nickel and tin. Other exchange traded products (ETPs) backed by aluminum, lead and zinc will be introduced next year. ETF Securities, JPMorgan Chase & Co and BlackRock Inc have all announced plans to start such funds. According to available information, gold-backed ETPs accumulated 2,099 tonnes of bullion since they started in 2003, equal to nine years of US mine output. According to Barclays Capital, commodity assets under management rose $19 billion to a record $340 billion in October. It is also important to note here that commodities are an important hedge against inflation.

Indian prices of such industrial metals have also risen in sync with the global prices.

This is creeping into domestic inflation. India's automakers have already announced price increases, as has been the case with prices of many fast-moving consumer goods. Domestic prices of petrol and diesel have been raised again as global oil prices threaten to breach the $100 mark. This will again feed into inflation.

It is also important to note in this connection that the days of cheap oil are over. Oil exploration has now become a much more costly affair as more prospecting takes place further offshore. As a result, oil prices are unlikely to return to former lows even if economic activity weakens.

With such cost pressures building up, inflation in India will continue to remain at an elevated level. Unlike in the US, which is threatened by weak domestic demand, such demand in India is very strong. This, along with capacity constraints, means that the pricing power in India currently resides with producers. While capital investments have been taking place, new capacity will only come up after some gestation period. Until that time, producers will be able to pass on price increases as domestic demand stays firm.

Capital inflows
This is the third important source of inflation. As the Indian growth story remains strong, capital inflows will continue to be a major source of headaches for the RBI, particularly with the developed world economies continuing with their own brands of stimulus programs. Increased inflows of capital are forcing the RBI to intervene to prevent abrupt appreciation of the currency. As this increases, the money supply, inflation jacks up.

On the other hand, a rate increase to ward off inflation has the potential to increase capital inflows, adding to the dilemma. Although a high current account deficit (thanks mainly to India's over-dependence on imported oil) can help absorb the increasing inflows, given India's growth story, capital inflows will continue to be an important factor.

Overall, I am expecting inflation to be a major concern for India in 2011.

Kunal Kumar Kundu is Senior Practice Lead, Knowledge Services Division, Infosys Technologies Ltd. The views are those of the author, whose website is Kunal's thoughts - Home.

After all that bla bla bla....I am left wondering if you have any idea about maths let alone read a graph...........am sure you have no idea about macro-economic indicators or what they mean. Economic data is not what it seems like. As an example Ghana is the fastest growing economy in the world. Does that mean they have surpassed India and china? Absolutely not! As in this case economic base needs to be considered which is massive in case of India and china.Comparatively now if you see Ghana's growth is minuscule. So get a life and stop pretending what you are not. In this case you are not lucky enough to be a proud INDIAN. I know situation is bad in Pakistan but that does not warrant a change in nationality!

 

[sanibhagwan]

On the other hand, a rate increase to ward off inflation has the potential to increase capital inflows, adding to the dilemma. Although a high current account deficit (thanks mainly to India's over-dependence on imported oil) can help absorb the increasing inflows, given India's growth story, capital inflows will continue to be an important factor.

True, Alternative energy sources like Nuclear are pricey as well. We have to import Yellow cake from NSG countries.

Overall, I am expecting inflation to be a major concern for India in 2011.

It is already having an impact. Essential commodity prizes are sky rocketing.

 

[indian_reality]

True, Alternative energy sources like Nuclear are pricey as well. We have to import Yellow cake from NSG countries.



It is already having an impact. Essential commodity prizes are sky rocketing.

You are right. Inflation comes as a gift with high growth. People gets money at their disposal which leads to demand which in turn fans inflation. In India a massive contributor to inflation are hoarders and price-fixing by cartels. The GOI is in a slumber or busy defending its own scams.......so no time to take a pro-active policy to bust these hoarders and cartels.
You can argue the why does china not have such high inflation? Simple. Iron grip of the communist party.Its a pressure cooker situation out there. Sometimes the communist party there imposes certain rules which acts like a valve to release the pressure. But just once if the valve fails to work , its going to explode. Such a situation is not there in India.
If you read statistical economic graphs selectively, then situation in china is dire as well. But we know that as of now thats not the case isnt it?

P.S : If you look at Pakistan's situation, just cut out the massive AID it gets from various patrons and what you will have is a bankrupt nation on every count.