Core sector growth slowest in 11 months
-- By Jitendra Sanghvi
That the eight core industries growth, at 3.5 per
cent in August 2011, was the slowest in 11 months could have far reaching impact
on industrial production. This drop in the growth rate from 4.4 per cent in the
corresponding month last year could be attributed to contraction in coal and
natural gas production by 15.3 per cent and 5.3 per cent, respectively.
The eight industries—crude oil, petroleum refinery
products, natural gas, fertilisers, coal, electricity, cement and finished
steel—have a combined weight of 37.90 per cent in the overall index of
industrial production (with the addition of two more industries, viz. natural
gas and fertilisers, the combined weight of these industries in IIP has
increased from 26.7 per cent). Industrial growth has plummeted to a 21-month low
of 3.3 per cent in July 2011 and that too when the core sector had performed
Core sector industries growth numbers have been
consistently found to be low, with a few exceptions, if we look at the one-year
Industrywise, crude oil (1.6 per cent as against
15.2 per cent in the corresponding month of 2010), refinery products (3.9 per
cent as against minus 2.3 per cent), fertilisers (4.3 per cent as against minus
5.7 per cent), steel (7.7 per cent v/s 10.8 per cent), cement (7.2 per cent v/s
1.6 pc) and electricity (8.9 per cent v/s 1.6 per cent) recorded positive growth
rates this August.
Inflation continued to be over nine per cent for the
nine months in a row till August this year, while growth numbers are bearing the
brunt of hike in policy rates by the RBI since March 2010. Overall economic
growth had declined to 7.7 per cent in the first quarter of 2011-12, the second
quarter in a row to record sub-eight per cent expansion in national output.
Overseas investment by Indian
companies $44 billion in 2010-11
According to the data released by the Reserve Bank
of India, overseas investment by Indian companies jumped by 144 per cent to
$43.9 billion in 2010-11 from $18 billion in 2009-10. During the first four
months (April - July) of the current fiscal, there was an outward foreign direct
investment of $13.3 billion.
This trend is indicative of Indian companies raising
capital more cheaply overseas at a time when the rupee borrowing costs in India
During July 2011 alone Indian companies carried out
as many as 289 overseas investment transactions that resulted in Outward FDI of
The government is considering setting up a
high-level panel that will approve overseas asset acquisition by state-owned
companies without going to the Cabinet.
Developing countries coming to the
According to the IMF projections, in 2013 for the
first time, developing and emerging economies will account for more than half of
the world’s gross domestic product, based on Purchasing Power Parity (PP). While
the financial crisis has helped, the trend of a greater share of developing
economies has been in the making for a long time. The greater economic clout
will, sooner or later, translate into a bigger political role as well, as seen
from the importance being attracted to the G-20. The share of advanced economies
in the World GDP is projected to decline from 63 per cent in the year 2000 to 49
per cent in the year 2013. During the same period, the share of developing and
emerging economies will increase from 37 per cent to 51 per cent. This, 2013
will be a watershed year for the world economy.
The downside to high growth for emerging economies
is a higher rate of inflation. India has been one of the economies most affected
by high inflation. Worse, according to the IMF projections, consumer price
inflation in India is not going to go away soon. The numbers show that it will
be as high as 8.5 per cent even at the end of 2012. It is only in 2013 that a
substantial drop is forecast for consumer price inflation. Consumer price
inflation in India was as high as 15 per cent in 2009 (end of the period). It
dropped to 9.5 per cent in 2010 and will be 8.5 per cent at the end of 2012,
dropping to 5.9 per cent at the end of 2013 and further to 5.3 per cent at the
end of 2014.
Rupee rises to one-week high
The rupee rose past 49 a dollar, to the highest
level in a week on optimism. European leaders would find a solution to contain
the region’s debt crisis.
The rupee strengthened by 0.7 per cent to Rs.48.75 a
dollar at the close of business on September 28 in Mumbai, according to data.
The currency rose the most in almost 10 months (Sept. 28), and is down by 8.4
per cent this quarter. Offshore forwards indicate the rupee would trade at 49.43
to the dollar in three months, compared with expectations of 49.78 (Sept. 28).
Forwards are agreements to buy or sell assets at a set price and date.
Non-deliverable contracts are settled in dollars.
Fiscal consolidation crucial for 9
The growth target of nine per cent envisaged for the
12th Five-Year Plan can be achieved only if inflation is brought down and
supply-side issues in agriculture are resolved. This would require greater
monetary-fiscal coordination and alleviation of supply-side constraints. It is a
challenge to achieve the Plan panel’s growth target and would require a
conducive global environment and policy reforms at home.
The wholesale price index (WPI) rose by 9.78 per
cent in August 2011 on an annual basis, compared with 9.22 per cent in July.
Empirical evidence suggests the threshold level of inflation is in the range of
4-6 per cent.
Global energy prices, which have remained steadily
high, (Global crude prices having risen from $85 a barrel in October 2010 to
$106 per barrel now), restrict elbow room for monetary policy responses.
Inflation rate has hovered over nine per cent in the last few months, despite
RBI raising policy rates a dozen times in last 18 months.
Food inflation inches up to 9.13 pc
Rising prices of essential kitchen items like potato
and pulses pushed food inflation closer to the double-digit mark at 9.13 per
cent for the week ended September 17. Food inflation, as measured by the
wholesale price index (WPI), was 8.84 per cent in the previous reporting week,
but as high as 17.02 per cent in the corresponding week last year. Fuel
inflation also rose to 14.69 per cent from 13.96 per cent, as petrol and
aviation turbine fuel turned expensive after rates were increased in the week.
Gold, silver slide in Mumbai market
In the Mumbai market, standard gold (99.5 purity)
plunged by Rs. 510 per 10 gms to close at Rs. 25,685 on September 29 from Rs.
26,195 on the previous day. Silver ready (.999 fineness) slumped by Rs. 1,700
per kg to end at Rs. 50,900 on September 29 from Rs. 52,600 per kg on September
28, 2011. Silver prices closed below Rs. 51,000 mark after nine months.
Rate hikes won't be passed on
By - Jitendra Sanghvi
Though the Reserve Bank of India
increased its policy lending rate for the 12th time in 18 months in its ongoing
fight against inflation, most large banks do not have immediate plans to toe the
lines of the Central bank in hiking their lending and deposit rates. This is the
first time in the past one year that top Indian lenders appear to be adopting a
different stance and hold rates steady, despite the RBI's continued hawkishness.
Home loan rates may not rise immediately; but borrowers should be prepared for
another hike in a month or two.
For example, between July 2010
and August 2011, RBI raised repo rate by 250 basis points to 8 per cent. During
the same period, State Bank of India, the country's largest lender, raised its
base rate or the minimum lending rate by the same quantum to 10 per cent from
7.5 per cent.
A series of hikes in policy rates
is discouraging new capital expenditure, pulling down growth.
According to the RBI Governor, it
may be premature to change the 'anti-inflationary' stance, shattering hopes that
increases are nearing an end.
The RBI, in its mid-quarter
monetary policy review, last week had raised the policy repo rate under its
liquidity adjustment facility (LAF) by 25 basis points to 8.25 per cent and the
reverse repo rate from 7 per cent to 7.25 per cent.
growth higher than projected
Year-on-year money supply (M3)
growth, at 16.7 per cent in August 2011, was higher than the projection of 15.5
per cent for the year, reflecting higher growth in term deposits and moderation
in currency growth. Similarly, year-on-year non-food credit growth at 20.1 per
cent in August 2011 was above the indicative projection of 18 per cent set out
in the July review.
Liquidity has remained in
deficit, consistent with the stance of the monetary policy. The daily average
borrowings under the LAF were around Rs 40,000 crore till September 15, 2011.
Going forward, the stance will be
influenced by signs of downward movement in the inflation trajectory, to which
moderation in demand is expected to contribute, and the implications of global
FDI dips to $1.09
billion in July 2011
After whopping jump for two
consecutive months, India's foreign direct investment declined by 38 per cent
year-on-year in July 2011 to $ 1.09 billion from $1.78 billion in July 2010.
In June 2011 the inflows saw an
annualised increase of 310 per cent to 11-year monthly record of $5.65 billion.
In May 2011 as well inflows touched $4.66 billion, showing an impressive jump of
111 per cent over a year ago period.
For April-July 2011 FDI went up
by 92 per cent to $14.54 billion from $7.56 billion in the corresponding period
last year, as inflows were robust in the initial months.
For the first half (Jan. - June)
of the calendar year 2011 FDI showed an increase of 57 per cent to $16.83
billion. Despite uncertainties in the global economy, FDI may touch $35 billion
in 2011-12 as against $19.4 billion in last fiscal on account of major deals
like RIL-BP and Posco.
Most economists expect another
rate hike in the October policy review, before RBI presses the pause button,
unless the US dollar dips—that is there is a further worsening in the global
economic environment or a better-than-expected outcome on the inflation front.
But industry lobby groups are distinctly unhappy. Their contention is that the
rate hike will only exacerbate the current fears of an impending slowdown.
FDI in services
Foreign direct investment (FDI)
into India's services sector tripled to $2.19 billion during the first quarter
(April-June) of 2011-12, according to the data published by the Industry
Ministry last week. The financial and non-financial services sector had
attracted FDI worth $695 million in the corresponding quarter of 2010-11.
India to topple
Japan as the 3rd largest economy
India might become the world's
third-largest economy in 2011 by overtaking Japan in terms of GDP, measured
according to the domestic purchasing power of the rupee, otherwise called
purchasing power parity (PPP).
India is now the fourth largest
economy, behind the US, China and Japan. Numbers from 2010 show that the
Japanese economy was worth $4.31 trillion, with India snapping at its heels at
But after March's devastating
tsunami and earthquake, Japan's economy is widely expected to contract, while
India's economy will grow between seven and eight per cent this fiscal.
Were it not for the earthquake
and tsunami, India would have overtaken Japan in around 2013-14.
The Economist's Big Mac index,
which takes the price of a Big Mac burger across 120 countries to calculate the
'real' price of its currency, is a crude way to measure PPP. India was included
in the index recently. It showed that the rupee was undervalued by as much as 53
per cent against the dollar in August.
The IMF expects the Japanese
economy to contract by 0.7 per cent in 2011, while India is expected to grow by
8.2 per cent.
petrol consumption growth
Following decontrol of its price,
the consumption of petrol is rising at a much slower rate than used to be the
case. Till two years earlier, the consumption was growing almost by 14 per cent
a year. It is now growing at 5 per cent (between April and August), less than
even the projected seven per cent growth for the current fiscal year.
Since decontrol took place in
June 2010, there has been almost 40 per cent jump in prices. According to the
Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum, petrol
consumption grew by just 4.5 per cent in August 2011, the second lowest growth
in recent years.
The trend this year has been in
sharp contrast to the double-digit growth witnessed in petrol consumption in
recent years, riding on the automobile sale boom. In 2009-10 the consumption
growth was 13.9 per cent. It dropped in 2010-11. But even after that, it
remained in double digits at 10.8 per cent.
Car sales too registered a 15.8
per cent dip in July 2011, the first after a gap of 30 months. The August
decline was not as much; but still in double digits. Car sales are expected to
remain under pressure in the near future on account of factors like high