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