Indian Economy Next Quarter Rains still not favouring India’s granary in the northwest, August rains key now Pressure on pulses prices set to ease with imports and higher crop by winter RBI holds rates, but inflationary pressures will force its hand by last quarter Commodity prices set to rise as global growth signs turn more positive High government borrowings pushing bond yields upwards Subdued dollar as emerging economies show more promise this year India : Kal, aaj aur kal As we have been emphasising in the past few newsletters, despite the negative WPI inflation numbers, all is not calm on the inflation front. Right now attention has focused on inflation in food articles and manufactured food products, standing provisionally at 9.7% and 8.5% for the week ending July 25th. Consumer price indices for June are also registering higher inflation than previous months, CPI AL for instance stands at 11.52% inflation; this is on top of the 8.77% rate in June 2008. Clearly, the government’s ‘touchy feely’ talk on being the saviour of the poor has been negated by inflation. Could the government have done anything different? We believe it could have and should have. By preferring to reduce emphasis on the consequences of a high fiscal deficit on inflation, the government has done a great disservice to the country.

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The Emerging Economy
– Monthly Newsletter from Indicus
Analytics
6th August 2009
Indian Economy Next Quarter
Rains still not favouring India’s granary in the northwest,
August rains key now
Pressure on pulses prices set to ease with imports and
higher crop by winter
RBI holds rates, but inflationary pressures will force its
hand by last quarter
Commodity prices set to rise as global growth signs turn
more positive
High government borrowings pushing bond yields upwards
Subdued dollar as emerging economies show more
promise this year
India : Kal, aaj aur kal
As we have been emphasising in the past few newsletters,
despite the negative WPI inflation numbers, all is not calm
on the inflation front. Right now attention has focused on
inflation in food articles and manufactured food products,
standing provisionally at 9.7% and 8.5% for the week
ending July 25th. Consumer price indices for June are also
registering higher inflation than previous months, CPI AL
for instance stands at 11.52% inflation; this is on top of
the 8.77% rate in June 2008. Clearly, the government’s
‘touchy feely’ talk on being the saviour of the poor has

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been negated by inflation. Could the government have
done anything different? We believe it could have and
should have. By preferring to reduce emphasis on the
consequences of a high fiscal deficit on inflation, the
government has done a great disservice to the country.
This quarter’s story will be repeated for many quarters to
come. Though the focus on price rise will change from
product to product over time, there is no doubt that we
are heading for higher levels of inflation in general. Right
now the story is about pulses, and within that mainly tur.
Prices of tur or arhar have risen 45% in the WPI since Jan,
other pulses are in double digit rises, except gram. The
problem with tur specifically is because last year’s output
was 25% lower than the previous year. But tur being a
crop that survives when rain is inadequate, going ahead,
the high prices and low rain have already raised acreage
sown under this crop this year. Import tenders have also
been floated, pressures on the prices of tur will therefore
lessen by winter. Meanwhile rain is still deficient in the
granary of India, but stocks of rice and wheat are high.
The problems therefore appear less this year but will
aggravate in the year ahead, especially if rains fail the Met
prediction in August.
As we have said time and again, the time is past for just
pushing money in the hands of people, without raising
production and productivity levels – If Punjab and
Haryana get through this poor monsoon with a halfway
decent crop, it will be thanks to the irrigation systems set
in years or decades ago. So what can a soft-hearted
government do?
Economic policy requires hard headedness at its very
foundations. Want to give 100 rupees to the poor? Go
ahead, but get Rs. 100 productive asset out of it. Want to
give more money to government servants? Then get them
to deliver that much. And it is possible to do so. A large

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majority of government staff provide services of some
type – education, health care, water supply, safety and
security, justice, etc. Their output is measurable and it is
possible to link salary increases with their output
improvements. And all of these have direct productivity
benefits for the country. But we hear of no such talk.
What is this government scared of? It has no opposition.
Issues of inflation, upward pressures on interest rates,
weakening currency apart from pressures on the fisc are
here to stay for many years to come. The point is we are
stuck with higher levels of inflation in the year ahead, the
RBI has already raised its estimate to 5% and will need to
raise it further still as time goes by; one after the other,
more spikes will be seen in some products which might
eventually abate, but overall inflationary pressures cannot
be wished away. As global growth picks up, prices of
commodities will also pick up, thereby impacting the
manufacturing sector pricing as well. It is better we are
prepared for all of this. Governments internationally had
gone in for unbridled spending in the past, hoping that
growth will create a pie large enough, but when that did
not pan out, the poor and underprivileged had to suffer
the most. Soft-heartedness and hard-headedness can go
together.
Sumita Kale and Laveesh Bhandari
Sumita Kale is Chief Economist, and Laveesh
Bhandari is Director, Indicus Analytics. They can be
contacted at sumita@indicus.net and laveesh@indicus.net
Economic Growth
IIP showed subdued but better growth in industrial sector
in May at 2.7% provisionally, with February’s growth was
revised upwards from the initial negative 1.2% to a final
positive 0.7%.

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Infrastructure sector performed well in June, raising
production by 6.5%, as compared to the growth of 5.1%
last year – cement, electricity, crude oil and coal outdid
their previous year’s growth rates in June.
The Markit PMI Survey shows July output levels in the
manufacturing sector at similar levels to June, the index
stood at 55.3 indicating growth. The new orders index
rose to 59.75, the highest level in nine months.
The Fourth Advance Estimates for 2008-09 agricultural
production puts growth in foodgrain output at 1.3% higher
than the previous year, compared to the last estimate that
showed negligible increase in output.
Wheat production is now estimated higher in 2008-09 by
3%, compared to the previous estimate of a decline by
1%.
Pulses output fell by 0.7% as tur took a substantial hit last
year, sugarcane fell by 22.1%, cotton by 10.5% and
groundnut by 23.4% - putting pressure on prices of these
commodities this year.
Cement production in June rose by 13.01% while
dispatches rose by 12.84%.
Media reports indicate that Maruti sales rose by 33.36% in
July over the last year, Mahindra and Mahindra reported
vehicle sales growth by 22.04% while Honda car sales
rose by 11.99%.
Rail freight traffic increased by 9.59% in June over the
previous year, higher than the 7.81% growth clocked in
June 2008.
Data from Airports Authority India shows that
international passenger air traffic to India has picked up,
rising by 3.9% in May over last year, while domestic
passenger air traffic has continued its decline by 5.9%
over last May.
Domestic freight however has risen by 3.5% in May over
the previous year, while bad export markets continue to
dog international freight, which declined by 4.3% in May
2009.

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Hiring in companies increased in June, over the previous
month, according to the Naukri Jobspeak Index, which
began conducting the survey in July 2008.
Rains in July increased the water levels in the 81 storage
reservoirs monitored by the CWC, however, storage levels
are still less, at 78% of the 10 year average.
Except for tur dal, maize and cotton, most crops are
reported lower acreage sown so far, bringing the total
kharif acreage sown by 24th July to 7.9% less than the
area sown the previous year.
Read:Bullish on China, India: Nouriel Roubini
Inflation
Provisional WPI estimates put inflation for the week
ending July 25th at a negative 1.58%. However significant
upward revisions have raised May inflation estimates by
one percentage point.
In June consumer price inflation rose, with the CPI AL
recording 11.52% yoy and CPI IW at 9.29%.
NCDEXAGRI index of spot prices of agricultural
commodities has risen by 8.35% over the period 11th
July-1st August.
Prices of tur and sugar have been rising over the past six
months on lower production last year.
International crude oil prices climbed down to touch
$58.25 a barrel on July 13th, but have since risen in the
range of 65-70 by the end of July, on positive global
economic data.
Read: When will tur dal touch Rs. 100/kg?
Read: Anxiety over food inflation
Interest Rates

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The 10 year benchmark gilt touched a low of 6.7978% on
July 17th but rose again to 6.9691% on July 31st.
While the RBI kept rates unchanged in its July end Credit
Review and signalled intention to maintain an
accommodative stance in liquidity, there was emphasis on
the need to begin withdrawing the looser credit policy, in
tandem with the government fiscal stance.
Rates therefore are seen to edge upwards by the end of
the fiscal, if growth and inflation estimates move higher.
High government borrowing, higher oil prices and a build
up in inflation will put an upward pressure on bond yields.
Read: Global Financial Crisis- Questioning the questions
Read: Bank Chiefs should tell Alistair Darling to stop
meddling
Read: Bernanke broke rules, Paulson fumbled, Fed
managed great panic
Exchange Rates
Exports in the month of June were 27.7% lower than the
previous year in dollar terms and 19.4% lower in rupee
terms, while imports fell by 29.3% in dollar terms and
21.2% in rupee terms.
Oil imports were 50.6% less in June compared to the
previous year, while non-oil imports fell by 16.5% on
account of slower growth this year.
Trade deficit for the period April-June 2009 stood at $15.5
billion, lower than the $28.6 billion last year, on account
of lower imports.
Forex reserves which had been falling due to capital
outflows with the global crisis have now an upward trend
since April, rising to $ 267.71 billion as on July 24th. This
is higher by $15.73 billion compared to March end and
lower by $38.89 billion over last July.
The dollar traded at its lowest against the pound and the
euro this year, on better than expected economic news
from Europe.

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The rupee ranged between 48 and 49.5 to a dollar during
July, as upward pressure has been curtailed by the RBI
and a subdued dollar.
Read: Dr. Subbarao as Tiger

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