Economy Review: June 2009

Actual rainfall for the country as a whole was 39.5 mm till 17 June against 72.5 mm normal with a deficiency of 45%. Out of the 36 meteorological subdivisions, rainfall was excess/ normal in 8, while it was deficient/ scanty in 28 subdivisions.

According to India Meteorological Department's (IMD) long range forecast update issued on 24 June for south-west monsoon season (June to September); rainfall is likely to be 93% of the long period average of 89 cm with a model error of ±4%. Earlier, IMD in April last, had forecast Near Normal rainfall.

IIP
Index of industrial production (IIP) increased 1.4 per cent in April 2009. The growth though only one-fourth the pace a year ago, signaled the halt to the morass in the preceding four months that recorded cumulative decline. More expressively for evolving state of affairs, the revised estimates for past some months have placed the IIP rates less gloomy than those put out under quick estimates earlier. Thus, the average growth now works out to 2.6 per cent in 2008-09, a tad better than 2.4 per cent given out earlier.  Among the 17 two-digit industry groups, six posted annual decline in April, half the number in the preceding month and the lowest in past six months.

However, manufacturing that accounts for nearly four-fifths of overall IIP continued its extremely weak performance, expanding only 0.7 per cent in April, while electricity and mining were up by 7.1 per cent and 3.8 per cent, respectively. Obviously, availability of minerals and power or their costs did not cause the hold up in manufacturing, the hindrances lay on demand side.

Projects investment seems to have looked up. Capital goods remained in the negative zone, though severity of sag at 1.3 per cent was a sixth of 7.5 per cent in March. Intriguingly, while the capital goods declined, the composite index of electrical and non-electrical machinery, conceptually the main component of capital goods showed 9 per cent healthy growth. Contrasting trends in machinery and overall capital goods apparently present a conundrum to analysts. The production index of non-metallic mineral products expanded 10 per cent, basic metals & alloy industries 5.1 per cent and transport equipment & parts 6.3 per cent, all indicative of relatively healthy projects investment.
 
Money supply
Broad money (M3) expanded 3.8 per cent till 5 June, speeding from 2.3 per cent in the corresponding period of 2008-09; the source of growth has shifted from forex assets to banks' credit to government which shot up by Rs 114, 673 crore, twice the velocity a year ago.

Bank credit flows
Non-food credit by scheduled commercial banks increased Rs 19,834 crore during the fortnight ended 5 June, reversing the declines of preceding two fortnights.  Still, total non-food credit till the date in the current fiscal was running Rs 31,236 crore lower, compared to Rs 16,592 crore rise in the corresponding period of the preceding year. Reflecting hectic food procurement, food credit expanded Rs 12,897 crore, nearly thrice that a year ago. Credit-deposit ratio dropped from 73.08 per cent to 69.42 per cent.

Interest rates
The liquidity was abundant with average per day mop-up of over Rs 1 trillion in the first half of June.

Weighted call money rates in call money market ranged 3.07-3.24 per cent in the first 18 days of June and 1.87-4.58 per cent till this date in the current fiscal, much lower compared to 4.07-8.98 per cent in the first quarter of 2008-09.

The cut-off rate for 91 days T-bills worked out to 3.36 per cent in its auction on 10 June, while the similar rate for 182 days T-bills was assessed at 3.59 per cent. The implicit discount rates on commercial papers floated in the first half of May ranged 2.83-9.90 per cent, lower compared to 3.3-10.25 per cent in the second fortnight and 6-12.5 per cent in the first fortnight of April.  The longer term GoI securities were traded at 6.49-8.08 per cent YTM in the secondary market in the week ended 12 June, against 8.08-9.17 per cent in the corresponding week a year ago.

Prime lending rates of five major banks ranged 11-12.25 per cent by 5 June, against 12.25-12.75 per cent a year ago. Deposit rates were 6.5-8.25 per cent, against 8-9 per cent. Bank rate was 6 per cent, reverse repo 3.25 per cent, repo rate 4.75 per cent and reverse repo rate 3.25 per cent.
Rupee was traded at 47.39/40 per USD on 12 June. Rupee depreciated annually by around 10 per cent against US$, 17 per cent against Yen and 1 per cent against Euro, but appreciated by 7 per cent against Pound Sterling.

Foreign Trade
The declining phase in export continued for the 7th month in April 2009, the longest lean period in recent years, due to downturn in world markets. Side-by-side, mirroring slowing economy, imports dropped annually for the fourth straight month. Oil import was 58.5 per cent lower in April and non-oil import 24.6 per cent. Trade deficit for the month was 44 per cent lower, against 45 per cent escalation a year ago. The fiscal 2008-09 had witnessed 3.4 per cent rise in export and 14 per cent in import that resulted in 34 per cent bulge in trade deficit. Oil import was up by 16.9 per cent to $93 billion over the year, while non-oil import grew less by around 13.2 per cent to $195 billion.

Central Govt. finance
Gross fiscal deficit of Central government shot up by 64 per cent to Rs 54,158 crore in April 2009. Total disbursements escalated by 43 per cent to Rs 66,217 crore; non-plan expenditure zoomed 60 per cent and plan expenditure by a relatively modest 14 per cent. Tax receipt (Rs 7,462 crore) yielded 32 per cent less.

Earlier, the Central government had ended 2008-09 with a fiscal deficit of Rs 3.30 trillion (provisional estimate) according to CGA data, nearly two-and-a-half times the budgeted amount of Rs 1.33 trillion, indicating among the sharpest splurges in recent years. The ratio of deficit to GDP at market prices shot up to 6.2 per cent, reversing all the improvements in reduction in the ratio since 2001-02. Lower receipt due to economic slowdown and duty cuts caused one-third of the overshooting of deficit, while extra disbursements due to stimulus packages, pay commission award and farmers' loan write-offs the two-thirds. Non-debt receipt fell short by Rs 666 billion, while expenditure overshot budget allocation by Rs 1,306 billion. Revenue deficit burgeoned 3.7 times to Rs 2.47 trillion due to more revenue account disbursements compounded by lower revenue receipt. By the way, total expenditure of Rs 8.81 trillion turned out to be around 2 per cent less than that placed in revised estimates presented in interim budget on 16 February, but fiscal deficit exceeded RE by 1 per cent, as tax receipt fell short by a higher 4 per cent. Fiscal deficit which was around 25 per cent more annually in H1 shot up in the second half that recorded 5 times higher deficit on y-o-y basis. Unlike in recent past, where fiscal deficit in second half worked out to a half of that in the first half due to better receipt, relative to disbursements, 2008-09 witnessed doubling in deficit in the second half due to truncated receipt and mushrooming disbursements. Incidentally, the fiscal deficit would work out much higher to around Rs 4.26 trillion, if we adjust the government data for issue of Rs 759 billion of oil bonds issued to oil marketing companies and Rs 200 billion special securities to fertilizer companies which are not part of fiscal deficit as per government accounting system.

Prices
The WPI based annual inflation entered the negative territory when the week ended 6 June recorded 1.6 per cent y-o-y drop in overall price index, the first such occurrence after 30 years. The y-o-y increase in WPI was running at double digits for six months till November 2008, but came down thereafter because of the economic slowdown to 5.9 per cent by the end of December, and compounded by high base effects of last quarter of 2007-08 quickened the plunge to less than one per cent by the end of March 2009. In the current fiscal, the WPI Index has resumed upward trend and the price rise worked out to 1.8 per cent by 6 June, though because of the high year ago effects, annualized inflation continued to fall culminating in the inflation slipping to negative zone by the date.

Most of the commodity groups show uptrend in the current fiscal (till 6 June), barring some where the slack seems to have deepened. Thus, the WPI of only transport equipment, cotton textiles, tyres & tubes and paper & paper products show a decline till early June in current fiscal, against stagnation, or positive growth on y-o-y basis. All other groups, including those having bearing on investment as reflected in ERIL Index of Cost of Project Inputs point to upward pressure on prices; implying lessening declines or stronger positive growth. Noteworthy among these assortments is the heavy weight crude mineral oil which has shown 1.7 per cent rise in WPI, against 19 per cent decline on annualized basis as on date. Crude prices in the global markets are on the rise again and if the pass-through is allowed in the domestic market this could cause inflation spiral in the economy. Likewise, WPI of food and non-food articles has already risen by 3-4 per cent and processed food products by 5 per cent; this could go up sharper if south-west monsoon underperforms. CPI numbers which matter more for households were running at 9 per cent high in April.

ERIL Index of Cost of Project Inputs was running 6.9 per cent lower by 6 June on annual basis and 0.1 per cent since March 2009.


Source : ProjectsToday

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