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

Inflation and IIP number

Friday, November, 13, 2009: The IIP numbers coming down somewhat was something that was expected and I see it coming down further in the coming months, barring a few exceptions. The growth of capital goods is due to the liquidity that the government pumped in by way of pay commission and other stimulus measures. Sustained and stable industrial growth does not happen when the consumer level inflation is in the range of 15% or when you get peas at Rs 80 a kg. Car sale figures are not representative of industrial revival it merely shows that banks are desperate to lend and they consider lending against an asset called automobile to very safe, I think banks would do much good to India if they start lending to small enterprises on merits. It will solve many direct and indirect problems.
I disagree with economists who want to revise the numbers upwards in the coming months. The weakness of the dollar, the way Yuan is moving against the dollar, US unemployment figures etc point to a poor export growth scenario in the coming months. The numbers that we are seeing are due to the excess liquidity of the west that is pouring into India, the ground reality is that the feel good factor is due to this free money from the west, which can be called back anytime, it is their money not ours; we must keep this in mind. We have to be cautious and optimistic together. The growth that we are seeing is because of the feel good factor that is due to availability of easy capital. Fundamentals of economics point towards something quite different.

The base effect will start coming into play from Jan 2010 onwards and we must keep that in mind. I would like that RBI monitors the lending of the banks. Fundamental growth does not come by selling cars; in India it will come when the small enterprises flourish when agricultural production per unit land area increases. On the side of the government they will need to ensure that inflation is kept under check, else the social problems will surpass the economic issues and it would be something that cannot be tackled by either monetary or economic policy.

What's Spooking the Stock Market

[Note : As appeared in Mail Today, 30-Oct-2009]

Inflation Figures

The inflation figures released today are quite realistic in nature and have confirmed the fears that I have been citing for such a long time. I still differ from the planning commission that food prices will moderate in the coming weeks, it cannot- people do not change food habits so fast. Government will need to look at supply side constraints to contain prices; it is as simple as that. Depending on any kind of monetary policy to contain inflation would be a mistake. The higher food prices will hamper the recovery of the economy in a big way. While the RBI has indicated of higher interest rate regime in the coming months, it would not be enough to contain inflation. It may be counter productive, in the sense that it will further slow down the process of recovery with not much impact on consumer level inflation. We are in a tight and critical situation and each step must be carefully thought off before being executed.

[Note: According to the figures of 5-Nov-2009]

Economic Note - Economist Siddharth Shankar

While the figures of car sales, real estate prices and the stock market indices may all signal that things have bottomed out, I’am still not convinced that we are out of the bad phase. I expect that unemployment in India would continue to rise; coupled with this increased unemployment would be high inflation that would translate into social problems very soon. We have already seen inland security is becoming a major problem and a major cause of that is the un-employed youth, we cannot fight it by force, it can only be countered by providing employment to the youth and by way of educating them. I think the government must focus on this larger socio-economic issue rather than bothering too much about short term economic recovery.

I still do not see manufacturing or service sectors picking up in the near term. A much bigger problem will come in how to ensure that small business are able to sustain themselves in the coming one year. Government and the central bank have to look at sustaining the small businesses for overall stability of the Indian economy. The industry on its part will have to act with maturity and ensure that they do not push up the wages as it would lead to wage push inflation.

[Note: As said by Economist Siddharth Shankar on - 7-Nov-09]

Impact of Inflation

Looking at the figures released yesterday the inflation has maintained an upward tick. While the upward move was statistically expected the worrying part is the build of inflation this fiscal that is around 6% and which is higher than last year. If we look at the components, the numbers worry me more because the inflation has been higher because of basic items like tea, pulses, spices etc. If we exclude the drop in prices of items like aviation turbine fuel and light diesel oil the inflation figures would become more worrisome. If the current trend continues we would land up at an annual figure of between 8-10% that would translate into 20% inflation at the consumer level. Looking at the trend I think the government has to become more proactive to control inflation than RBI.