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Economy: Signs of worry? - Views on News from Equitymaster
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  • May 14, 2008

    Economy: Signs of worry?

    Rise in commodity prices and concerns over a US slowdown have been weighing heavy on inflation and the stockmarkets in India. In this article we shall take a look at certain factors, which could prove to be a hindrance to growth going forward.

    High crude prices: The crude prices recently touched a record high of US$ 126.4 per barrel causing jitters across the globe. A weak dollar, strong demand for oil and fuel from China and India, concerns about declining crude production in Mexico and Russia and the OPEC's refusal to pump more crude are keeping prices near record highs. Further, Goldman Sachs, in a report, expects crude prices to rise to US$ 150 to US$ 200 per barrel within two years. Oil imports during March 2008 were valued at US$ 8.6 bn. This was 76.6% higher than oil imports valued in the corresponding period last year. Oil imports during the period April-March 2008 were higher by 35.3% than the oil imports in the corresponding period last year. Given that India imports 75% of its crude requirements, an increase in the import bill is likely to worsen the trade deficit going forward.

    Falling rupee: The rupee has fallen 3.6% against the dollar since May 2008. It is down 6.5% in 2008, after rising by more than 12% in 2007. Rising crude prices and slowdown in fund inflows due to the global credit crisis has caused the rupee to depreciate. While a depreciating rupee signals a positive sign for India's exports, imports will turn dearer, further pressurizing the trade deficit.

  • The poorer Rupee

    Inflation: Inflation has reared its ugly head and the latest figures have reported inflation to be at 7.6%. This is 50 basis points higher than the figure of 7.1% reported during the week ended April 5, 2008. It has become a serious cause of concern for the government, central bank, corporates and consumers. Inflation has remained significantly higher than the RBI's (Reserve Bank of India) comfort zone of 5.5% for the past 3 months. Persistent rises in prices of food, energy and other global commodities are expected to keep the inflation at higher levels. While the government has responded by banning the exports of pulses and rice (except basmati) and reducing the import duty on certain edible oils, whether these measures will be effective in cooling down prices remains to be seen.

  • Food crisis: Growing worries

    Slowing IIP: IIP grew by 3% YoY in March 2008. This is significantly lower than the figure of 14.8% recorded in the same month last year. Though the slowdown is partly on account of a high base effect, high interest rates and rising input costs have started impacting demand. The industrial slowdown has largely been attributed to the sharp drop in manufacturing, which has a high weight in the IIP. Manufacturing grew by a mere 2.9% in March 2008 as against a 16% increase in March 2007. Even electricity (3.7%) and mining (3.8%) grew below their trend rate. Higher cost of capital has certainly resulted in some weakness in investment led demand.

    Credit slowdown: The loan advances of banks, which had grown by more than 30% for the last 3 years, have slowed down to 23% this year, which is below the central bank's projection of 25% for the year. Going forward, credit growth is likely to slow down further as banks are becoming increasingly cautious on account of rising delinquencies especially in the retail segment.

    Trade deficit: India's trade deficit has widened by a whopping 35% led by soaring global crude prices and an appreciating rupee (the latter has hampered exports). The trade deficit increased as the growth in imports surpassed export growth. Exports have taken a hit largely due to slowing external demand on fears of a recession in the US, sharp rupee appreciation and high domestic interest rates.

    Looking ahead...
    The world economy has been going through a turbulent period; first on account of the subprime crisis and now on account of escalating commodity prices with India feeling the heat too. As per IMF, India's growth is expected to decline to 7.9% driven by slowdown in investment on account of tightening credit condition. The Indian economy, according to government estimates, was expected to grow at 8.7% during 2007-08. Having said that, while higher inflation and the fallout from the subprime mess is likely to act as a dampener on the Indian economy in the medium term atleast, in the longer term the growth story is expected to remain strong.



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