Economy Review :March 2009

As was widely feared, the Indian economy expanded much slower at 5.3 per cent during October-December 2008 according to CSO data, retarding from around 7.8 per cent in H1 and by a sharper extent, when compared to 8.9 per cent in this quarter of 2007-08. The economy growth over the first three quarters of the current fiscal slowed to 6.9 per cent, from 9 per cent in the corresponding period of 2007-08.Obviously, the global meltdown has reached Indian shores and checked the speed of the country, which was chugging at 9 per cent in last three fiscals.

While most of the sectors grew less, what really caused the slide was the underperformance of agriculture that declined 2.2 per cent annually over the quarter and manufacturing that weakened marginally. While the drop in agriculture partly reflected the high base year effect of a record 6.9 per cent expansion in Q3 of 2007-08, it is manufacturing whose failure causes concern as factory output had been growing robustly over past three-four fiscals. Apparently, the sector bore the deep scars of global recession, notwithstanding relatively strong domestic consumption and investment. Interestingly, mining output did much better by growing at 5.3 per cent and power generation that grew 3.3 per cent also bettered the H1 feat.

Real incomes from construction grew 6.7 per cent, though it too indicated slowing from 10.5 per cent in H1 and 9 per cent a year ago. Gross fixed capital formation, an indicative of project investment, was lower marginally, compared to Q2 but was 5.3 per cent more, relative to a year ago outlay. Apparently, infrastructure investment has continued, though could be at a lesser pace. Stocks shot up at twice the speed in H1 due to demand resistance in several sectors. Reflecting reduced incomes from farm and factory sectors, private final consumption slowed to 5.4 per cent annually, from 6.9 per cent in Q2 and 7.8 per cent in Q1. But, the slack was made good by darting government consumption expenditure.

The service sectors have continued to be main props to the market expansion. While trade, hotels, transport & communication slowed to 6.8 per cent from 11 per cent in H1 in tandem with lower farm and factory output, financing, insurance and other business services accelerated by 9.5 per cent, against 9.2 per cent in H1 and community, social & personal services, reflecting shooting government expenditures partly to boost economy, shot up 17.3 per cent, twice the rate in H1 and three times the rapidity in Q3 of the preceding fiscal.

IIP declines again in January
Factory output as measured by index of industrial production (IIP) declined 0.5 per cent in January 2009 – the second consecutive month of an annual drop in the output. The rot was caused by manufacturing that reduced 0.8 per cent, the third drop in the current fiscal and mining, which also declined marginally, the first in the current fiscal. More worryingly, there were no high base year effects which could justify the downturn even statistically. Out of 17 major two-digit sub-groups, as many as 12 posted negative growth rates in January and 7 during the first ten months of the current fiscal. Reflecting discouraging outlook on demand side, the wholesale price index (WPI) of manufactured products nearly stagnated by the end of February.

By the way, decline in IIP in December has been pared to 0.6 per cent under “first” revision”, against 2 per cent in “Quick” estimates” issued last month and the “second” revision of October data has resulted in 0.1 per cent rise, against 0.4 per cent decline earlier. Taking these as pointers, January data may not hopefully be so gloomy after they have undergone revisions.

The composite production index of capital goods shot up 15 per cent in January, though part of the spurt has to be discounted for relatively low 2.6 per cent mount a year ago. Cumulatively, capital goods production rose 8.6 per cent, half of 18.5 per cent in the first ten months of 2007-08. Electrical and non-electrical machinery output rose 17.5 per cent in January and 8.7 per cent cumulatively, whereas transport equipment and parts declined for the fourth consecutive month, which pulled down the cumulative rise to barely 2 per cent. Among the inputs to construction industry, even as cement production has rendered itself quite creditably with 7.1 per cent cumulative rise due to demand from rural and unorganized segments as also infra investments, finished steel has wilted under faltering demand from construction and automobiles, with declines over October-December and average rise of 2.3 per cent only.

Among the other use-based classifications, consumer goods, supported by consumer non-durables, put up comparatively good performance with 5.3 per cent rise. Intermediate goods recorded 2.9 per cent erosion and basic goods a sub-optimal 2.5 per cent rise. Petroleum refinery output increased 3.1 per cent (7.3 per cent) and crude oil deteriorated from marginal rise to 1.3 per cent fall. However, coal production has fared better with 8.8 per cent rise (4.8 per cent).

Money supply
The y-o-y growth in broad money (M3) worked out to 19.6 per cent by 27 February, having slowed from 21.7 per cent a year ago. Net forex assets of banking sector grew 3.9 per cent, nearly one-tenth the pace a year ago, whereas the bank credit to government shot up 38.7 per cent (4.6 per cent). Reserve money which reflects currency etc coming out of RBI with a potential to fuel M3 growth expanded 5.8 per cent (25.4 per cent) by 13 March.

Bank deposits & credit
Aggregate deposits with SCB were up by 16.9 per cent till 27 February, slowing from 18.2 per cent in the similar period of 2007-08. Bank credit growth slowed from 16.8 per cent to 13 per cent. Banks’ non-food credit and investments in corporate securities expanded 12.8 per cent, half the pace projected for the year. SLR investment increased by 22 per cent (25 per cent). Reflecting steep decline in CRR, bank balances with RBI declined by Rs 62,656 crore, against Rs 73,995 crore bulge in the similar period a year ago.

Interest rates
Overnight inter-bank call money rates ranged 2.42-4.57 in the first 18 days of March. The reverse repo rate was at 4 per cent and the repo rate 5.5 per cent. The cut-off yields on 91 days and 364 days T-bills were at 5 per cent and 3.25 per cent at the auction on 12 March. Discount rates on commercial papers (CP) ranged 5.8-11.75 per cent on CP issued in the second fortnight of February. Yields to maturity (YTM) on longer-term Government of India securities traded in the secondary market were at 6.04-8.79 per cent in the second week of March. Prime lending rates of major banks ranged 11.5-12.5 per cent in the first week of March. Deposit rates were at around 7.75-9 per cent. Cash Reserve Ratio (CRR) was 5 per cent. Rupee was traded at 464.64/65 per USD on 13 March. Rupee depreciated annually by around 22/23 per cent against US$ and Yen, 6 per cent against Euro and 31 per cent against Yen, but appreciated by 14 per cent against Pound Sterling.