Analysis of the Financial Year 2009-2010

Overall the year 2009-10 was a year of optimism for the Indian industry.  The recovery that we saw in the 2^nd half of the current fiscal was remarkable inspite of decline in agricultural output.  The worrying factor that has evolved in the current fiscal was the double digit food inflation that was caused due to supply side constraints & had nothing to do with the relaxed monetary policies. Over the last 2 months the spillover of the inflation to non-food items has been and will continue to remain a cause of serious concern. RBI by raising the interest rates has done the correct thing to try to contain the non-food inflation but I feel RBI will need to be a little more aggressive.

While the recovery in the GDP’s is quite broad based, the question that comes to my mind is can we sustain this level of GDP growth rate in view of the fact that the sentiment at the consumer level has not really gone up.  Whatever growth we have seen is primarily due to the reduced interest rates that the banks have offered to consumers & consequently the increased demand.  The share of expenditure on food items is gradually declining which is a sign of a transition towards growth in the economy.  The service sector which has been the engine for growth of India has shown a decline in the growth rate & in the coming months with the cost structure that the Indian economy is getting into it would be difficult for us to sustain a robust growth rate in this sector.

 The major reason for the buoyancy in the markets has been the inflow of hot money from the west.  This inflow of cashmay not last long once the central banks in the west start increasing their interest rates and the regime of loose money is rolled back. The inflation’s that we may see in the coming months may show a decline but that would be mainly due to the base effect & the ground reality would be very different from what the figures would project.

The world economies have still not shown a definite improvement in their structure.  We still have countries like Greece & Portugal who are struggling & struggling hard to come out of the effects of the economic downturn. To sum up the current fiscal, it was a great year with lot of optimism and it can be sustained provided we are able to take care of the inflation and the supply side constraints.

By:

 

Economist, Siddharth Shankar

Kassa Financial Services

Budget Chat with Economist Siddharth Shankar on Rediff

Joby asked, what basic differences between India and China are? When the latter is a manufacturing superpower...we are nowhere near them...yet we too have good and abundant labour.

Siddharth Shankar answers, Hello! China is a manufacturing hub and India is a service hub. We both excel in areas that are different. We as a country will need to get more disciplined and trust me we can surpass China.

kcjena asked, What are the benefits the corporate sector get from the new budget.

Siddharth Shankar answers, Hello! I think the immediate benefit I see is the increase in disposable income that the consumer would have, reduced surcharge and most importantly a status -quo on the policies of the government.

srini asked, Is the global crisis behind us?

Siddharth Shankar answers, Hello! I am not sure if it behind us. The recovery is still in its nascent stage and is stimulus driven.

GaneshNadar asked, what’s the difference between inflation and pushing the prices up

Siddharth Shankar answers, Hello! Inflation means increase of prices.

Paresh asked, Pranabda extended the repayment period of farmers' loan by six months, and he cited drought and floods, yet there is no end to farmer suicide. How much is the government's faulty irrigational policy is to blame for this

Siddharth Shankar answers, Hello! Till about 15 years back we as an economy did not have money to build canals, it is only now over the last 5 years that we have funds. For irrigation we need water, the way we are becoming a consumption economy, forget water we will be short of all natural resources. Thus I would want the India gets back to a saving economy; things will automatically start falling in line.

sriram asked, Typically the interest rates have to be atleast 2% more than the inflation rate. However if you look at the interest rates they are atleast 0.5% less than inflation Why is the government so keen in having free flow of money ?

Siddharth Shankar answers, Hello! Government wants people to borrow and use it so that activity in the economy can be generated.

Bhabani asked, as an economist what is your take on India's SEZ and land acquisition policy?

Siddharth Shankar answers, Hello! I think we have vast areas of land in Rajasthan on which crops cannot be grown, thus, I think land that cannot be cultivated should only be acquired for the industry or SEZ. Agriculture is going to be critical for India and thus we should not let even an inch of cultivable land be acquired.

meetbasu asked, In this Budget, Finance minister wants to bring down the fiscal deficit to 5.5% in fy2010-11,which was 6.8% in fy2009-10.Therefore the government borrowings is also lower than what it was expected. Growing @ the rate of 7.2% at the cost of fiscal deficit of 6.8% for the fy2009-2010.How you substantiate this? Do you thing India is on right track of development?

Siddharth Shankar answers, Hello! At this juncture, it is important for the economy to grow, not only from the point of figures but also from a social perspective. Deficit can be taken care off once the economy has enough reserves. I have a lot of faith in the Finance Minister and he is trying to move in the correct direction.

abhimannu asked, Has the government done the correct thing by allotting only Rs 1,47,344 crores for the defense sector?

Siddharth Shankar answers, Hello! Defense is a subject that the government would know the best. It depends on lot of factors and thus it would be in-appropriate to comment on it knowing only part of the whole scenario.

GaneshNadar asked, the budget is meant to kill the common man and solve India's population problem

Siddharth Shankar answers, Hello! I think with the constraints of the FM he has tried to do the best he could. Population is a social problem and I feel education is the best way to solve it and we have seen allocations to educations going up.

Bunty asked, if it is going to fuel more inflation, how will it bring down fiscal deficit?

Siddharth Shankar answers, Hello! Fiscal deficit can be brought down by reducing expenditure. Let us just not depend on the government to do it, we as a citizen have a role to play in reducing deficit, to put it simply if I stop wastage, I save for the economy and thus the deficit.

Jagan asked, why are the prices touching the sky? Who according to you is to blame? Has the government taken the right steps to arrest it?

Siddharth Shankar answers, Hello! The prices are going up due to supply side constraints. Any measure that the government takes will not yield immediate results; it is a long drawn process. I think the government is realizing the importance of agriculture in our economy and is taking steps to improve agriculture productivity.

alok asked, Fd rate may increase in next 2 to 3 month

Siddharth Shankar answers, Hello! I have my doubts if the Fed will raise rates in the next 2-3 months. The recovery is still stimulus based.

Mohan asked, while the taxpayer may have a little extra cash at hand, most of it will drain coz of high prices of essential goods. So how good are the Budget proposals?

Siddharth Shankar answers, Hello! You are right, the disposable income is not going to rise much but the FM has ensured that the average household feels a little lesser pitch of the rising prices.

Som asked, does it make sense to divest states in profit making PSUs?

Siddharth Shankar answers, Hello! It depends on what is being divested. Personally I feel that while privatization is good, government must keep to itself or be a part of some critical industries.

Jay asked, Sir, both the FM and PM have refused to roll back petro prices. In the long run will it do the country any good?

Siddharth Shankar answers, Hello! I think yes it is good that they are not rolling back the prices. We are in a market economy and the prices must be governed by market forces. Why should the poor of this country pay to run cars?

Monu asked, your comments sir about the budget...will it leads to further inflation?

Siddharth Shankar answers, Hello! I do not think the budget will lead to a substantial increase in inflation but it will surely have an impact on pushing the prices higher.

Inflation Analysis on 4, February, 2010

The decline in WPI on a week to week basis is primarily due to seasonal effect, nothing more should be read out of this declining figure. We still have a rising inflation in non-seasonal food articles on a week to week basis. If we look at the price build up in wheat & pulses in the current year it is very evident that we are in times of very high inflation in the coming months. The winter rains have not come & various claims that we are hearing that the inflation would come down seem doubtful to me. Even if we have some winter rains now, I feel, it would have negative impact on agricultural. I have my doubts if we can sustain these levels of IIP numbers with no disposable income available to the general mass. I think it is high time that the government & the banks start looking at funding agriculture and infrastructure rather than funding cars

Current State of Economy

While the general sentiment in India is highly bullish, I am of the view that the Indian economy is not going to barge out of the cage and shoot up with growth. We still have the major issues of inflation and job creation that need to be handled. High unemployment and inflation would be one of the toughest domestic challenges facing the government. Getting people back to work will be high on agenda of the Government for its long term prospects. Creating jobs is critical to sustaining the economic recovery when government stimulus fades. I do not see much job creation happening in the manufacturing or construction sector, services sector may see some stabalisation. While layoffs may not be there but new hiring is also not there and that shows that we are in for a very bumpy recovery. I think RBI should not raise the interest rates in the 1st quarter of 2010.

Economic Note on Inflation

While the index of inflation for primary articles declined by 0 .7% on a week to week basis, I feel this decline is nothing to rejoice about. If we look at the components of primary articles decline in inflation has been primarily due to the seasonal effect on production of fruits & vegetables. The Non-Food articles have shown an increase and so has been the case with minerals. The disturbing part in the non food articles is the rise in price of fodder which directly impacts the farmer and the livestock. The rise in the index of minerals and fuels indicates to the rising input costs of many industries which finally would reflect in higher prices of final products. The consumer confidence index released today has shown a downturn & is at its lowest level in last one year. The bad part about this decline in index has been that  the major down turn has come in from Tier II & Tier III cities of the country & is primarily due to the concerns of inflation & spending.

In India the annual food price inflation is still in the range of 20%. It is high time for the Central Bank to take charge of the liquidity situation in the economy to ensure an even flow of money into the system. It may be too early to talk about the withdrawal of liquidity by the Central Bank but surely we can expect a quicker monetary tightening in view of the higher asset prices & rising inflation. I would like to see the RBI giving some definitive signals that would warn the banks against excessive lending to non productive sectors. On the other hand The Government must look into long and short term measures to improve supply of food items.

Global and Indian Economy Round Up

Global Economy

Are the world economies getting any better? This question is becoming hard to answer. The economic indicators that we are seeing today point towards recovery, but the big question that we need to ask ourselves is whether these indicators are actually a true representative of recovery. To give an example, in today's context an increase in manufacturing activity need not necessarily mean an increase in employment. Over the past decade most of the companies have started working on a lean work force model, thus, this conventional wisdom that an increased manufacturing activity leads to increase in employment is false in the current context.

Strong shots of stimulus have kept the whole economy going but all the bills for the stimulus & bailouts are coming to an end. Deficits are soaring, banks are still ailing, unemployment is very high & off course there are huge national debts. Several pieces of evidence are pointing towards caution. The capital expenditures have not risen, not many businesses see the next few months as good for expansion. These facts suggest that it is still too early to call a sustained recovery.

It is said that Asia is leading the world economy out of recession but there would be a dangerous black tail to this recovery. I foresee a strong risk of social unrest as unemployment & inequality rise in the coming months. We had seen a small preview of the social unrest in China. While the social unrest may not destabilise any of the economies, it will undermine the crucial role of Asia as an engine for the global economic growth. The countries that I fear may have social problems would be China, Thailand, Indonesia, Philippines, Sri Lanka, North Korea & to some extent India. Another aspect that might dampen the growth would be the social pressures that the government of these countries would face and its impact on further reforms.

While outbreaks of violence are rare in India, the major concerns would be the asset price bubble that is growing at a rapid rate. We have seen certain spurts of social unrest in India when thousands of farmers were protesting for the low sugarcane prices or when there was uproar to form a new state of Telengana & other separatist also accord this thought of breaking other states of India.

Indian Economy

The data received from the states on sowing of the Rabi crops is showing that the area under cultivation for wheat has increased but if we look at the figures in detail the total area under cultivation of coarse cereals is down by approximately 8%, the total area under cultivation for oil seeds is also down by almost 8% & the total area under cultivation for pulses is down by 5%. If we look at the progress of rains for the last two months it has been very poor & we have not seen winter rains really coming by. Going by the predictions, not much rain is expected even in the M/o January 2010. Even if we are optimistic & see rains happening post January 15, the rains would have no material impact on the production of wheat. In case the rains are delayed & happen in the first week of February, we would have negative impact on wheat production. Going by the above analysis it is very clear that we are in times for a very high food inflation which could impact the disposable income. This in turn will impact the buying capacity of an average consumer which in turn would affect the manufacturing activity in India.

The trade figures that have been released point towards increased export numbers but this increase is mainly due to the base effect. If we compare the consolidated figures from April 2009 till November 2009 there has been a negative growth in both exports & imports. This means that the economy is still not fully back on track. Lots of economists have been talking of domestic consumption as something that can save & insulate India from recession / global shocks but it must be understood that for consumption to happen there has to be a net inflow into the economy and we are still to see that happen.

I am still of the view that banks should push business loans rather than pushing auto loans.

Siddharth Shankar

Too early to go for number upgrades - Economist Siddharth Shankar, Kassa Financial Services

ET Now: You said 7.9% is a decent number, what do you read between the lines, which part of the break up do you like the best?

SS: Well I do not have the figures right now but broadly looking at 7.9% it is really what was expected according to me because see the IIP numbers, manufacturing numbers, the car sale numbers, the amount of private consumption expenditure numbers that we have been seeing over the last three months , the amount of buoyancy that is there in the market I think it is really nice. I would like to look at the figures of how the services sector has performed before I can really take a call on the GDP numbers but as far as the manufacturing and IIP numbers were concerned I think this was an expected number.

 

ET Now: We are talking about the mining index and that's one that seen good activity the manufacturing side as well coming in fairly strong, how do you see this picture playing out now so now the second quarter is behind us, how do you see the picture now playing out for the months of October-November and December?

SS: I think the impact of agriculture towards making the whole GDP numbers spiralling a little downwards would be seen in this third and the fourth quarter. So I should see a negative kind of impact because of agriculture on the GDP numbers in the coming two quarters that is the third and the fourth quarter. Looking at the manufacturing side I think we should go little flattish, the consumption expenditure if you look at the expenditure side I think again we would be little flattish in the third and the fourth quarters because fourth quarter is I would look at the liquidity being tightening a little bit by the RBI so we should see little moderation in the GDP growth in the third and fourth quarter numbers.

ET Now: What is your view, do you agree that it is going to be the services sector that have probably grow now because October numbers on the manufacturing side have coming a little soft?

SS: I think so services sector is the thing that will go forward now but I think I like to add two more things that once we are comparing the figures from the second quarter of last year to this year I think the base effect needs to be taken into account and the second thing that is important when we look at the future figures of Q3 and Q4 would be the level of inflation and the corresponding disposable income that would be available to the people so I would not look at the industrial growth that we have seen in the second quarter continuing in the third and the fourth quarter. But services sector yes definitely it will play an important role in the overall GDP numbers in the coming two quarters.

ET Now: Sure, Siddharth your view GDP estimate now is there a case for revision upwards even though agriculture might be a little put a spanner in the works, we have already seen momentum coming in very strongly across the rest of the economy?

SS: I think I would not still revise the GDP estimates upwards for the entire year because we are still to see how the winter rains play their role now because that is going to impact the crop that is coming in the second and the third quarter. Second as I said the inflation would impact the amount of disposable income available to the consumers so the disposable income might go down. So I think the GDP numbers should not be revised as of now till we see the third quarter GDP numbers for the overall year.

ET Now: One more point for you, markets are looking extremely excited about this number, we have got Mr. Montek Singh Ahluwalia also saying that it is time not revises numbers upwards, why are you still maintaining such a negative, you know not a negative view but why so much hesitation as yet to talk about upgrades?

SS: There were few factors that are forcing me not to revise the number upwards firstly would be the agricultural production that we would see in the third and the fourth quarter because of which we should see a lower kind of disposable income and had inflation rate which would again result in a lower disposable income which would directly impact the industry.

(This story is from a program Markets Now on ET Now, which came on 30th November, 2009. Economist Siddharth Shankar, shared his expertise and views on Economy with the ET Now team. Excerpt from the interview is as above)