AUTHOR: Rama Krishna Vadlamudi
MUMBAI
December 8th, 2008
Stock markets in India have been following the global trends in the past one year. The global financial crisis, credit crunch, collapse of large financial institutions in the US and Europe, lack of business confidence and severe compression of global trade have affected the Indian bourses hugely. Investors in India have been looking toward global cues rather than domestic economic indicators.
As a result, our markets have also shown profound fall in stock prices since January 2008. The fall was more pronounced since the middle of September 2008, after the collapse of Lehman Brothers Inc and bailing out of AIG, Fannie Mae and Freddie Mac in the US.
Central Banks the world over have been battling recessionary pressures through a combination of fiscal incentives and infusion of huge liquidity into commercial banks with a view to shoring up confidence among banks.
Even though Indian economy is driven more by domestic consumption rather than exports, wild swings in foreign capital flows have been impacting the domestic currency and other capital market flows.
The Central Government has spent huge amounts outside the Union Budget which include Rs 25,000 crore released to banks as part of the farm loan waiver package; Rs 39,000 on fertilizer subsidies; and Rs 10,000 crore paid to government employees as part of the Rs 25,000-crore salary hike on the Sixth Pay Commission Award.
The fiscal deficit was estimated to be at 2.5% of GDP at the end of March 2009 at the time of presenting the Union Budget in February 2008. However, due to the additional expenditure of off-balance sheet items, as mentioned above, the fiscal deficit is estimated to shoot up to 6 to 6.5% by the end of this fiscal year 2008-09.
The government has announced a further borrowing programme of Rs 45,000 crore between 1.12.08 and 31.03.09. All these measures are likely to put pressure on the government’s finances and the government is sure to miss the FRBM targets of 2.5% fiscal deficit and 1% revenue deficit by March 2009.
INDIA'S EXPORTS AND GDP GROWTH
India’s exports in October 2008 fell by 12.1% in dollar terms to USD 12.8 billion as compared to October 2007. However, exports grew by 8.2% in rupee terms due to sharp depreciation of rupee against the dollar. India’s forex reserves have dipped by 20% in dollar terms to USD 248 billion. FIIs have withdrawn USD 13.5 billion (net) between January and November 2008. India’s GDP grew by 7.6% during second quarter of 2008-09, according to CSO.
The economy expanded by 7.9% during the first quarter, taking the first-half GDP growth to 7.8%. During the year 2007-08, the economy grew by 9 per cent. Tax collections have been showing signs of weakness of late. On the positive side, Inflation rate based on Wholesale Price Index (WPI) has come down to 8.40% as compared to 12.91% reached in the first week of August 2008.
Crude oil also has fallen by more than 70 per cent from its peak attained in July 2008 to the present USD 42 a barrel (NYMEX). Other commodities prices have also fallen sharply. The country is witnessing a healthy capital inflow through ECBs as well as Foreign Direct Investment.
WHAT ARE THE PROSPECTS
Since the middle of September 2008, RBI has cut repo rate by 250 bp to 6.5%, reverse repo rate by 100 bp to 5%, SLR by 100 bp to 24% and CRR by 350 bp to 5.5%. All these liquidity and policy measures have infused additional liquidity of Rs 3,00,000 crore into the system.
On the forex front also, RBI has announced a slew of measures to boost dollar liquidity. However, monetary policy measures have a tendency to impact the rates in the real economy in a slow and gradual manner. Because of certain distortions in the interest rate mechanis in India, monetary policy transmission is weak.
The measures taken by RBI are going to have an impact in the next two to three months. Petrol and Diesel prices have also been cut. This is expected to accelerate the fall in inflation rate in the coming months.
To tackle the slowing economy, the Central Government had on December 7, 2008, announced certain fiscal measures to stimulate the economy. The package includes: an additional expenditure of Rs 20,000 crore in the current year, Cenvat cut of 4% on all products other than petroleum, boost for housing sector and raising of Rs 10,000 crore tax-free bonds by Indian Infrastructure Finance Company Limited.
The stimulus package is expected to speed up highway projects worth over Rs 60,000 crore under separate phases of national highway development programme. Coupled with the RBI’s rate cuts in the last three months and government’s fuel price reduction, the fiscal stimulus package is likely to have a positive impact on the economy.
It is quite reassuring for the markets to know that the government will take all policy steps necessary to give a boost to the economy.
Picture and Design: By the author
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
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