Global finance turmoil
The world economy has entered a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s. Global growth is projected to slow substantially in 2008 as per IMF’s World Economic Outlook (WEO) 2008 October Update, with a modest recovery likely to begin later in 2009. Inflation is high, driven by a surge in commodity prices, but is expected to moderate. The situation is exceptionally uncertain and subject to considerable downside risks. The immediate policy challenge is to stabilise financial conditions, while nursing economies through a period of slow activity and keeping inflation under control. Many advanced economies are close to or moving into recession, while growth in emerging economies is also weakening.
The financial crisis that first erupted with the U.S. subprime mortgage collapse in August 2007, deepened in the past six months and entered a tumultuous new phase in September 2008. The impact has been felt across the global financial system, including in emerging markets, to an increasing extent. Intensifying solvency concerns have led to emergency resolutions of major U.S. and European financial institutions, and have shaken confidence severely.
Against this backdrop, the baseline growth projections have been marked down by 20 basis points for 2008 and a sharper 90 basis points for 2009, relative to the July 2008 WEO Update. Global growth is now expected to moderate from 5.0 per cent in 2007 to 3.9 per cent in 2008 and 3.0 per cent in 2009, its slowest pace since 2002. The advanced economies will be in or close to recession in the second half of 2008 and early 2009, and the anticipated recovery later in 2009 will be exceptionally gradual. Growth in most emerging and developing economies would decelerate below trend.
India’s response
RBI and the Finance Ministry are fighting a battle to ensure adequate liquidity in the system, which has turned from abundance just four-five months back, to a stranglehold that could turn into solvency disaster.
The liquidity stranglehold has come about because of first-time experienced steep decline in forex reserves due to FII repatriations and global financial turmoil. Thus, the forex reserves dropped $9.9 billion during the week ended 10 October, over $7.9 billion in the preceding week. Despite RBI’s dollar sales, rupee lost heavily against dollar, with yearly depreciation put at 18 per cent by 17 October, as against 6 per cent appreciation just six months back.
Crunch of fund is relatively more harmful than its excess as it immediately leads to solvency problems for banks and financial institutions, and this spins off into lower as also costlier funds for corporates. This is obviously not congenial to a growing India that has lined up huge infrastructure capex programmes. Therefore, despite relatively high inflation and M3 and bank credit exceeding projections, loosening monetary policy finds support on solvency and growth counts.
The measures taken by the apex bank for augmenting dollar flows and rupee resources included:
• Cash reserve ratio (CRR) slash by as much as 250 basis points in the first half of October, to 6.5 per cent, injecting Rs. 1 trillion into banks
• Repo rate cut from 9 per cent to 8 per cent
• Rs 20,000 crore release through special 14 days Repo auctions, to help funds-starved mutual funds
• Rs 25,000 crore given to banks as reimbursement of farm loan write-offs
• SLR requirement relaxation
• Twice a day LAF
• Hikes in NRI deposit rates
• Liberalisation of ECB guidelines.
The total liquidity support through reductions in the CRR, the temporary accommodation under the SLR, and the first installment of the agricultural debt waiver and debt relief scheme was placed at around Rs 1.85 trillion.
RBI has kept CRR, Bank Rate, Repo and Reverse Repo unchanged in its mid-term monetary policy announced on 24 October. The GDP projection has been revised downward to 7.5-8 per cent from 8-8.5 per cent in April and 8 per cent in July, but WPI-based inflation forecast has been kept at 7 per cent. The stance of the policy would be to ensure a monetary and interest rate environment that optimally balances the objectives of financial stability, price stability, well-anchored inflation expectations, and growth.
Southwest monsoon
Southwest monsoon has ended with cumulative rainfall from June 01 to 30 September placed at 2 per cent below normal. Thirty-two out of 36 meteorological sub-divisions recorded excess/normal rains. Kerala, East Madhya Pradesh and Vidarbha were among the regions that were rain deficient.
Industrial production: End of Sunny Days?
Industrial production as measured by index of industrial production (IIP) tumbled to 1.3 per cent in August, the lowest pace since October 1998, slashing hopes of a revival raised due to recovery noticed in the past two months. Obviously, the slowdown that had set in the industry in the last five months of the preceding fiscal after 17-18 months of solid double digit mount (barring stray dips), has gathered downward speed in the first five months of the current fiscal.
Manufacturing grew only 1.1 per cent, the steep decay from 8 per cent in the preceding month and one-tenth of the year ago feat. While mining continued to improve with 4 per cent Y-o-Y mount, against 3 per cent in the preceding month, Electricity followed Manufacturing rot with only 0.8 per cent rise. The average growth in overall IIP and Manufacturing worked out to 4.9 per cent and 5.2 per cent, respectively in the first five month of the current fiscal, both half the pace a year ago and lower still than the feat two yeas back. Crude oil and Coal covered separately under infrastructure industries IIP showed 1 per cent decline and 7.3 per cent rise, respectively.
The growth rate in Capital goods dropped to 2.3 per cent in August; over 31 per cent shoot up a year ago (similar high base effect is in other segments of IIP also); but the cumulative mount also is half that a year ago. This would indicate that the production of Capital Goods that caters to projects investment has lost its moorings. Transport Equipment & Parts grew by 13 per cent, Machinery (other than transport equipments) by 8.4 per cent and Basic Metal & Alloy industries by 6.4 per cent; but Non-Metallic Mineral products stagnated at year ago level. Finished steel (carbon) increased by 3.9 per cent and Cement by 5.7 per cent.
While Consumer Goods bettered last year’s performance with 7.8 per cent rise during April-August, largely on the back of turnaround in consumer durables, basic and intermediate goods sank deeper. Among the other two-digit subgroups, basic Chemicals & Chemical products expanded by 7.5 per cent and Textile Products by 5.8 per cent cumulatively; but Cotton Textiles stagnated and Rubber, Plastic, Petroleum & Coal Products declined annually. Petroleum refinery output grew by 4.8 per cent, less than a half of that a year ago.
Money supply
The Y-o-Y growth in M3 worked out to 20.3 per cent by 10 October, lower than 21.9 per cent a year ago, but more than 17 per cent targeted for the fiscal.
Bank deposits & credit
Aggregate deposits with SCB were up by 21.6 per cent annually by 10 October, less compared to 24.7 per cent a year ago. But, bank credit increased by 29.4 per cent, faster compared to 23.6 per cent a year ago. Bank credit to Services sectors was up by 35.3 per cent, Industry sector by 30.6 per cent, Agriculture sector by 18.5 per cent and Personal Loans by 17.4 per cent till August. SLR investment increased by only by 3.5 per cent, which is one-seventh of the pace a year ago.
Interest rates
Overnight inter-bank call money rates ranged 5.57-16.51 per cent in the first 23 days of October, as against 6.14-14.81 per cent in September. The Reverse Repo Rate was at 6 per cent and the Repo Rate was brought down from 9 per cent to 8 per cent. The cut-off yields on 91 days and 182 days T-bills were at 8.69 per cent and 8.68 per cent at the auction on 15 October. Discount rates on commercial papers (CP) ranged 11.40-13.95 per cent on CP issued in the second fortnight of September, as against 10.25-14.25 per cent in the first half. Yields to maturity (YTM) on longer-term Government of India securities were at 7.64-9.67 per cent in the week ended 17 October. Prime lending rates of major banks ranged 13.75-14 per cent in the week ended 10 October. Deposit rates were at around 8.75-10.5 per cent. Cash Reserve Ratio (CRR) was pared from 9 per cent to 6.5 per cent.
Rupee was traded at 48.67/68 per USD on 17 October. Rupee depreciated annually by around 18 per cent against US$, 14 per cent against Euro, 29 per cent against Yen and 5 per cent against Pound Sterling.
Central government finance
The first batch of Supplementary Demands for Grants for 2008-09 authorising the government gross additional expenditure of Rs.2,37,286 crore, constituting the largest such supplementary demands, were introduced in the Lok Sabha on 20 October. Of this, the proposals involving net cash outgo aggregate to Rs.1,05,614 crore, with the balance of Rs.1,31,672 crore matched by savings of the Ministries and Departments or enhanced receipts and recoveries. The additional disbursements include Rs.65,942 crore of oil bonds, Rs.38,863 crore for Fertilizer subsidy, Rs.14,000 crore in Fertilizer bonds, Rs. 25,000 crore for Farmers Debt Relief Fund, Rs.10,500 crore for NREGS and around Rs.29,000 crore for Sixth Pay Commission recommendations implementation.
In the meantime, the Central government finances indicated a gross fiscal deficit (GFD) of Rs 1.17 trillion in the first five months of 2008-09, 13 per cent more than that in the similar period a year ago. Revenue deficit of Rs.0.98 trillion was 82 per cent more. The last two months witnessed sharp increases in these two indicators on quality of government finance, relative to year ago feat.
Cumulative gross tax receipt for the period increased by 25 per cent to Rs 1.90 trillion. Corporate tax, personal income-tax, customs duty and service tax maintained healthy growth. Excise duty receipt, which had shown decline till June, exceeded year ago receipt by 13+ per cent in the next two months, though cumulatively the levy showed only 6.5 per cent Y-o-Y rise. Total expenditure worked out 3 per cent higher during April-August 2008. Plan expenditure was up by 20 per cent, while non-plan disbursements showed 3 per cent decline, relative to their year ago levels.
Exports & Imports
Exports increased by 35 per cent to US$81.3 billion during April-August 2008, according to DGCI&S data.
Total imports were up by 38 per cent to US$1.3 trillion. Oil imports were US$ 46 billion (+60 per cent) and non-oil imports US$84.4 billion (+28 per cent).
Trade deficit
The trade deficit was estimated at US$49.1 billion (US$34.5 billion).
Inflation
Annual inflation as measured by the overall Wholesale Price Index (WPI) was at 11.07 per cent by 11 October 2008, having declined consistently from 12.14 per cent over past four weeks. The WPI of Primary Articles rose to/by 11.5 per cent and that of Fuel & Power and Manufactured Products to/by 14.5 per cent and 9.5 per cent, respectively. Consumer Price Index (CPI) for industrial workers ran 9 per cent higher and for urban non-manual workers 8.5 per cent in August. CPI of agricultural/rural workers worked out 11 per cent higher in September. The composite ERIL Index of Cost of Project Inputs showed 11.9 per cent escalation. The WPI of Iron & Steel subgroup shot up 29 per cent.
Projects investment
Engineering goods export shot up to 53 per cent to $7.4 billion during April-May. Machinery import also escalated to 48 per cent to $6.6 billion over the period.
|