India's New Normal GDP Growth of 5-6% - VRK100 - 12Sep2012

Rama Krishna Vadlamudi, HYDERABAD   12 September 2012
www.ramakrishnavadlamudi.blogspot.com

India’s GDP growth rate seems to have stabilized at 5.5 per cent or between 5 to 6 per cent. The gross domestic product or national income growth rate is below six per cent for the second time in a row, after reaching lowest multi-year growth rate of 5.3 per cent in the January-March 2012 quarter. The growth rate for April-June 2012 is at 5.5 per cent, according to latest official estimates announced on 31 August 2012. By all indications, it seems 5 to 6 per cent GDP growth rate for India is the ‘New Normal,’ as they say. What are the reasons for the slowdown and what is in store for India’s future growth? Find out.

First Quarter GDP

The first quarter for India is from April to June. During 2012-13, the first quarter GDP recorded a growth rate of 5.5 per cent. This is driven by construction sector, which clocked a growth rate of 10.9 per cent over the first quarter of 2011-12. Other sectors that contributed to the 5.5 per cent growth in the first quarter are: finance, insurance, real estate & business services (10.8 per cent); community, social & personal services (7.9 per cent); and electricity, gas & water supply (6.3 per cent).

As can be seen from the following graph, the growth rate in the first quarter of current year has fallen to 5.5 per cent from a high of 9.2 per cent in the fourth quarter of 2010-11, showing a rapid deceleration in the GDP growth rate.

 Note: GDP at factor cost at constant prices (2004-05). Data from CSO.

Investment Activity Hits Rock Bottom

The most worrying factor is the lack of any meaningful growth in investment activity in the country. Due to a virtual halt in government clearances for new projects, lack of environmental approvals, bottlenecks in coal supply linkages and other policy inactions, new projects are not coming up at the desired level in the economy. This is shown in the gross fixed capital formation (GFCF), which is a measure of total investments made in the economy. It is measured by the total value of all fixed assets acquired less disposals, plus certain additions.

At constant (2004-2005) prices, the GFCF is estimated at Rs 4,49,701 crore in the first quarter of 2012-13 as against Rs 4,46,754 crore in the first quarter of 2011-12, showing a dismal growth of less than one per cent. This dismal situation is corroborated by other indicators, like, IIP.

In terms of GDP at market prices, the rates of GFCF at current and constant (2004-2005) prices during Q1 of 2012-13 are estimated at 29.9 per cent and 32.8 per cent, respectively, as against the corresponding rates of 31.2 per cent and 33.9 per cent, respectively in Q1 of 2011-12.

What of the Future?

The future for new investment activity is dicey. The Government of India seems to be in no mood to revive the slowing economy despite hopes of some policy initiatives from the government. India’s prime minister, blames the opposition parties for lack of political support to policy reforms; while the opposition parties are pointing their fingers at the prime minister; while the truth lies in between.

Various estimates put out by different agencies put India’s GDP growth for the current financial year 2012-13 at between 5 and 6.5 per cent. The most pessimistic estimate is from Morgan Stanley at 5.1 per cent. Other estimates are:

Ø      Reserve Bank of India                                6.5%

Ø      Crisil Ltd, Moody’s & CLSA                        5.5%

Ø      Citigroup                                                        5.4%

The reasons attributed by the private agencies for their pessimism are:

Ø      Government’s lack of control on fiscal deficit and growing public debt

Ø      Sticky inflation which remains at elevated levels of 7 per cent or more

Ø      Policy inaction from the Government on various reforms or measures

Ø      The continued dissonance between India’s ruling and opposition parties

Ø      The debt problems in eurozone and the US

My Take on the GDP Estimate

A wise man has once said that the best estimate for the next value is the same as the current value. The latest quarter growth rate is 5.5 per cent and so the best estimate for the next quarter could be 5.5 per cent, which gives an average of 5.5 per cent for the first half-year 2012-13 of 5.5 per cent.

What about the next half-year? Let us see some past data as given below:

        Note: GDP at constant prices (1999-2000) for years from 2006-07 to 2008-09 and at constant

                  prices (2004-05) for years from 2009-10 to 2011-12. Data source: CSO.

The above graph shows in the last two years, only two years (2009-10 and 2010-11) have seen GDP growth rates higher in second half-year than that of first half. So my presumption is that second half growth could be much lesser than that of first half, though absolute GDP in second half is higher than that of first half.

Even if we assume that the Government takes some policy initiatives to revive the economy, it will take another three to four quarters to reflect in the GDP figures. Considering the fact that the economy recorded a growth of 5.7 per cent in the second half of 2011-12, my guesstimate is that the economy may not be able to do any better in the second half of 2012-13.

Overall, it is safe to predict that India’s real GDP for the financial year 2012-13 is likely to grow by 5.5 per cent. As we have seen repeatedly in the past, the Government and its cheerleaders will try to talk up the growth rate without any concrete measure on the ground level. As a nation we muddle on with our dithering, the country’s poor and lower middle classes will continue to suffer with higher food prices, malnutrition, poor healthcare and skills deficit.

The 2012-13 GDP estimate of 5.5 per cent is the ‘New Normal’ for India.

My assumptions in arriving at the above GDP estimate are:

1). The Government will continue with its ‘dithering’ over policy reforms despite all talks to the contrary as it is bogged down in corruption scandals

2).  India’s ruling party seems to have lost its credibility with the common people and the prime minister has given the impression of being directionless and politically incompetent to take any policy reforms

3). The fiscal room available to revive the economy is limited at this point of time as the fiscal deficit is going to be very high in future

4). The Government will be unable to reduce its subsidy burden from fuel (diesel and LPG especially), food and fertilizers

5). Any downgrade of country rating by Standard & Poor’s will further weaken the sentiment about India in the short term

6). No doubt this is a crude attempt at estimating the GDP figures

- - -

Sorry friends, if I sound very gloomy about the economy,

but this is the reality and let us face it squarely!

CSO – Central Statistics Office of the Government of India

IIP – Index of Industrial Production

Graphs: Author

Data source: CSO

Disclaimer: This should not be construed as a recommendation by the author. The author has a vested interest in the general stock market going up. The views of the author are personal and he changes his views on the market and economy very quickly depending on various factors. Readers or investors must consult their certified financial advisors before taking any decision on their investments and the investment should be in line with their risk profile & risk appetite and their general market perception.

You can access my articles on financial markets at:

www.ramakrishnavadlamudi.blogspot.in

India GDP-First Quarter April-June 2011-VRK100-31Aug2011

Rama Krishna Vadlamudi, HYDERABAD 31 August 2011

To view this article in graphs and tables, just click:

www.scribd.com/doc/63724820


For quite some time, economists and market pundits have been telling that the Indian economy is in a slowdown. This has now been confirmed by the latest figures of GDP released by the Government of India. As per the data released on 30 August 2011, the first quarter (April-June 2011) GDP growth rate has come down to 7.7 per cent as against 9.3 per cent in the corresponding quarter of last year. However, the growth rate of April-June 2010 quarter is revised down to 8.8 per cent from 9.3 per cent as per the new series of Index of Industrial Production (IIP) with 2004-05 as base year.

What is noteworthy is that the quarterly growth rate has been on a downward spiral since April-June 2010 quarter as the RBI has been increasing interest rates since March 2010.

It is now official that economic activity is slowing down. What is pulling down the economy is a sharp dip in the growth rate of construction sector to 1.2 per cent in the latest quarter compared to the 7.7 per cent growth rate in April-June 2010 quarter. Other sectors that have contributed to the lower economic activity are: Mining and quarrying: 1.8 % (7.4%); and Community, social & personal services: 5.6 % (8.2%). The sectors that are doing better are: Agriculture, forestry & fishing: 3.9 % (2.4%); and Electricity, gas & water supply: 7.9% (5.5%). (Figures in brackets are for April-June 2010 quarter).

Policymakers are usually in the habit of talking up the economy. Of course, it’s their job! The cheerleaders say that the Indian economy will pick up pace in the second-half of the fiscal year. However, as is well known, empirical evidence suggests otherwise. In the last seven years, second-half growth rate is lower than that of first-half growth rate in five years.

Equity markets have taken the GDP figures in their stride and the reaction is muted except for the negative effect on prices of Larsen & Toubro and others. Now, the markets are trying to guess what the RBI will do on September 16th when it meets for policy rate revision. There are two strong opinions about further rate hikes by RBI. One camp feels that RBI should not raise rates further as the economy is already slowing and the stubborn inflation is caused by supply-side factors and other factors not connected with monetary measures. The second viewpoint is that RBI will opt for a further 25 basis point (0.25%) increase as inflation is not showing any signs of cooling down. My guesstimate is that RBI will go for a Repo rate hike of 25 basis points on September 16th.
GDP Growth Rate Declining

The steady decline in growth rate is due to a variety of factors, the main being the relentless raise of interest rates by Reserve Bank of India since March 2010. RBI’s hawkish monetary policy seems to be having the desired effect. Other factors contributing to the decline of GDP growth rates are: slowdown in investment cycle, policy-related issues such as, delays in land acquisition for new projects and environmental clearances. Major projects have been help up over the past few years.



Notes: Q1 2011-12 figure is based on new IIP series 2004-05 and other quarters are based on old IIP series 1999-2000.
Q1 – 1st quarter (Apr-Jun), Q2 – 2nd quarter (Jul-Sep), Q3 – 3rd quarter (Oct-Dec), and Q4 – 4th quarter (Jan-Mar). Source: CSO

RBI’s Repo rate hikes

Reserve Bank of India has been increasing Repo rates (the main policy rate) since March 2010. The Repo rate under RBI’s liquidity adjustment facility (LAF) has been raised by 325 basis points in the last 18 months; with 125-bp hike coming in the last three months.


Source: RBI




Overheard!
(It is fashionable to convert
everything into gold now)


Investment cycle slowing down

Estimates based on the expenditure side of the GDP also point to a slowdown in growth rate. If one looks at the figures of gross fixed capital formation (GFCF), it is very clear that the total investments made in the economy are tapering off. GFCF figure of Rs 4.11 crore (at constant 2004-05 prices) for the first quarter shows a year-on-year growth of only 7.9 per cent against 11.1 per cent growth rate in the corresponding quarter of previous year. Other two indicators, private final consumption expenditure (PFCE) and government final consumption expenditure (GFCE), are also pointing out the same downward trend. (See below for some definitions)

Half-yearly GDP growth rates

Many economists and policymakers want us to believe that second-half (October-March) growth rate is greater than that of the first-half (April-September). Empirical evidence suggests otherwise. Between 2004-05 and 2010-11, GDP growth rate in first-half (blue bar) was higher than that in the second-half (red bar) of the financial year in five out of seven years as can be seen from the graph below. Only in 2009-10 and 2005-06, second-half growth rates were higher than those of first-half. Of course, GDP in absolute terms is traditionally higher in the second-half compared to first-half.



Notes: H1 - April-September, and H2 – October to March. GDP at factor cost at constant prices (1999-2000) for years from 2004-05 to 2008-09 and for years 2009-10 & 2010-11, figures are GDP at factor cost at constant prices (2004-05). Source: CSO

Yearly GDP growth rates

As can be seen from the graph depicted below, the yearly GDP growth is on a roller coaster, moving up and down every two to three years.


Notes: GDP at factor cost at constant prices (1999-2000) for years from 2004-05 to 2008-09 and for years 2009-10 & 2010-11 figures are at constant prices (2004-2005). These are as per old base year of IIP series 1999-2000. The growth rate for 2007-08 is revised up to 9.2% from 9.0% as per new IIP series 2004-05. CRISIL opines the GDP growth rate for 2010-11 may be revised upward to 8.9 per cent as the latest estimates.

GDP prediction for 2011-12

We are already inundated with various estimates of GDP growth rate for the current financial year 2011-12. While RBI has come out with a forecast of 8 per cent GDP growth rate, the Centre for Monitoring Indian Economy (CMIE) has revised down its forecast to 8.2 per cent. However, many brokerage houses have revised their forecasts downward following the relentless raise of interest rates by RBI and global headwinds in the form of sovereign debt crisis in eurozone and the US losing its AAA credit rating. Their prediction is around 7.5 per cent growth rate for Indian Economy. Considering all the macro economic indicators, it would be safe to assume that India’s GDP growth rate will be in the range of 7.5 to 8.0 per cent for 2011-12.

Arguments for and against further policy rate hike by RBI

There are two powerful arguments at this point of time in favour of and against further rate hikes by RBI. The industry is of the opinion that the Reserve Bank of India should not further increase interest rates as GDP growth will be further contracted in future. Monetary measures will not be able to contain inflation caused by supply side factors.

Another view is that RBI will increase LAF-Repo rate by another 25 basis points (0.25 per cent) on September 16th during its interest-policy review meeting. It is argued that RBI will continue to focus on curbing inflation as the headline inflation is showing no signs of coming down. Even after the S&P downgrade of US’ credit rating, RBI top officials have given the impression that the biggest concern for them is inflation.
Arguments For Rate Hike Arguments Against Rate Hike
Food inflation is still high at 9.8% Crude oil prices have cooled off
Headline inflation is still at 9.2% and as such RBI and the Government are not comfortable with stubborn inflation Inflation is due to supply side factors and interest rates have no impact on supply chain bottlenecks
The Government seems unable to do anything thro fiscal measures, hence RBI is solely responsible for inflation containment Employment-generating sectors, like, construction, are adversely impacted
RBI's moves were dovish in 2010, hence it needs to continue with its hawkish outlook in 2011 Power sector, which is vital for the economy, is already suffering from coal shortages and interest burden
RBI does not want to be seen as going slow on controlling inflationary expectations Slowdown in GDP is already visible in automobiles, housing, etc., which may kill growth


Brent crude oil price touched 2011-year high of $127 and Nymex crude $114 per barrel – both during the second week of April 2011 and the prices have since cooled off. Now, Brent crude is quoting at $114 and Nymex crude at $88 per barrel. There are concerns about India’s fiscal deficit going out of hand. The effect of interest rate hikes is usually felt with a time lag of one to two years and their full impact is yet to be felt in the economy. The progress of monsoon till August is fairly good. Exports growth in the last three quarters is quite robust though imports too are growing at a strong pace. In toto, the signals are a bit mixed.

Against this scenario, will RBI raise interest rates further? It is a difficult question to answer. However, if one goes by the RBI’s moves in the last few years, one may come to a conclusion on this issue. Let us go back a little to understand RBI’s moves. When RBI started raising interest rates in March 2010, it said its measures were ‘baby steps’ in order to keep growth prospects intact. It was trying to maintain a balance between growth and inflation. At that time, the expectation of the RBI was that inflation would come down by November/December 2010. RBI continued its dovish monetary policy till December 2010 by raising Repo rate by small measures of 25-basis points each.

But, economies have a habit of tossing up surprises and we need to expect the unexpected. RBI’s expectations about inflation proved wrong as inflation (RBI uses wholesale price inflation index– WPI – for inflation management) did not show any signs of relenting even after December 2010. During the early part of this calendar year (2011), RBI changed its dovish stance and turned hawkish. And it started raising rates more aggressively. During the first seven months of this calendar year, RBI has raised interest rates by 175 basis points or 1.75 per cent.

Even though global developments – in the form of sovereign debt crisis in Europe and downgrading of US’s credit rating – have turned negative, RBI would find it difficult to take any drastic steps and change its hawkish stance toward interest rates. RBI may opt for some kind of consistency in its approach toward monetary policy. Until headline inflation shows clear and sustainable signs of deceleration, RBI may not change its current stance and may opt for a 25-bp rate hike on September 16th giving some indications of interest rates peaking – and this view is subject to one condition that there won’t be any nasty surprises in eurozone or in other countries.

Some Terms Explained

1. GDP at factor cost: GDP at factor cost is calculated as the total of all the eight sectors, namely:

1. Agriculture, forestry & fishing
2. Mining & quarrying
3. Manufacturing
4. Electricity, gas & water supply
5. Construction
6. Trade, hotels, transport & communication
7. Financing, insurance, real estate & bus. sers
8. Community, social & personal services

Broad classification of GDP at factor cost is as follows:
I. Agriculture : Item 1 above
II. Industry : Aggregate of items 2, 3 & 4
III. Services : Aggregate of items 5, 6, 7 & 8

2. GDP at market prices: GDP at market prices is the sum of the gross values added of all resident producers at producers’ prices, plus taxes less subsides on imports, plus all non-deductible VAT (or similar taxes). GDP at market prices is equal to GDP at factor cost (as per 1 one above) plus taxes minus subsidies. It can also be calculated by adding PFCE, GFCE, GCF and exports and reducing imports

PFCE – Private final consumption expenditure is expenditure incurred for consumption of food, beverages, tobacco, gross rent, fuel & power, clothing & footwear, furniture & appliances, medical & health services, transport & communication, recreation, education and others.

GFCE - Government final consumption expenditure consists of expenditure incurred by the government on both individual consumption goods and services and collective consumption services.

Gross Capital Formation (GCF) refers to the aggregate of gross additions to fixed assets (fixed capital formation), increase in stocks of inventories or change in stocks (CIS) and valuables. (GCF = GFCF + CIS + valuables)

Gross fixed capital formation (GFCF) is a measure of total investments made in the economy. It is measured by the total value of all fixed assets acquired less disposals, plus certain additions.

Notes:

The estimates of Quarterly GDP have been compiled by CSO using the new series of Index of Industrial Production (IIP). The new series of IIP with base 2004-05 was released by CSO on 10th June, 2011. The new series of IIP is based on a representative item basket comprising 682 individual items.

Abbreviations: CRISIL – Credit rating agency, CSO – Central Statistics Office (formerly known as Central Statistical Organisation), GDP – Gross Domestic Product that is national income, IIP – Index of Industrial Production, LAF – liquidity adjustment facility of the RBI, RBI – Reserve Bank of India, and US – United States.

Disclaimer: The author’s views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. Investors need to consult their certified financial adviser before making any investment decisions.

For author’s articles on financial markets, just click:

www.scribd.com/vrk100


http://www.ramakrishnavadlamudi.blogspot.com/

Market Outlook-VRK100-14062011

Market Outlook

In a state of flux

Rama Krishna Vadlamudi, HYDERABAD June 14, 2011


With Sensex hovering around 18,250 and Nifty well below 5,500 at the end of June 13, 2011, the Indian stock market looks to be in a lackluster phase. Investors seem to be worried about inflationary concerns, GDP growth deceleration, lack of governance, policy paralysis and political controversies surrounding anti-corruption stirs. However, investors are looking to a good monsoon, some solution to the anti-corruption agitations and some policy reforms. It remains to be seen whether investors’ expectations will be met. More rate hikes are expected from Reserve Bank of India in this fiscal year.

Inflation

Food inflation proves to be a nemesis for the Government with the latest figures showing a jump in food inflation to 9.01 per cent for the week ended May 28, 2011 compared to previous week’s 8.55 per cent. There is a big mismatch between supply of and demand for food items. Adding to the supply constraints is the rise in demand for food fuelled by rising income levels for the middle income groups in the urban as well as rural areas. Government seems to be having no right solution to control the food inflation in the immediate future. The Government seems to have passed on the buck to the RBI.

RBI rate hikes

Reserve Bank of India has been increasing policy interest rates for the past one year in order to contain inflationary expectations in the economy. It is expected to increase the benchmark repo rate by another 25 basis points or 0.25 per cent when it announces the mid-quarter review of its monetary policy on June 16th. The rate hikes are expected to continue for another two to three quarters. The markets have been bracing themselves for a further rate hike of 50-75 basis points in policy rates in this fiscal year. The banks may absorb some of the rate hikes themselves by compromising on their net interest margins and may pass on only a portion of the rate hikes to borrowers. The banks’ margins at present are at elevated levels giving them some cushion to absorb the rate hikes.

India’s GDP Growth

In the last four quarters, India’s GDP growth has come down substantially. After touching a high growth of 9.40 per cent (year-on-year) in the January-March 2010 quarter, the growth rate has come down progressively to 7.80 per cent in the January-March 2011 quarter. But the consumption theme seems to be in good shape despite the visible signs of a slowdown in the economy.

FII inflows

After pumping in $ 17.5 billion in 2009 and $ 29.4 billion in Indian equity markets, foreign institutional investors (FIIs) have slowed down their investments in Indian stock market during this calendar year. At $ 85 million of net inflows in this calendar year, their investments have been almost negligible. However, in the first two weeks of this month, they have put in $ 467 million or Rs 2,103 crore in the Indian equity market. The FII appetite for Indian stocks will depend on several global factors, including inflationary concerns in India. The US Federal Reserve (Fed) has been buying bonds worth $ 600 billion. The buying programme, known as Quantitative Easing 2 or QE 2, is coming to an end on June 30th. It is not yet clear whether the Fed will continue or stop its easy money policy after June 30th. If the Fed continues with another round of bond buying or QE 3, this easy money from the US will chase commodities and may push up commodities’ prices which may be negative for India in general.

Commodities

In the last one month, most of the commodities have come off their inflated levels. Silver has lost 30 per cent from record levels of close to $ 50 (per ounce) levels to $ 35.5 now. Crude oil on Nymex has come down to $ 97 (per barrel) levels with Brent crude hovering around $ 119. But gold prices remain steady at around $ 1,530 per ounce. Gold may continue its dream run for some more time as Europe is going deeper and deeper into a bigger mess following the sovereign crisis affecting Greece, Portugal, Ireland and Spain adversely. The latest news from Europe is that Standard and Poor’s has cut Greece’s rating making it the least creditworthy nation. The ratings agency cut Greece’s rating three notches from B to CCC and said the country was likely to default on its debts at least once by 2013. With such anxieties, most of the commodities may come down going forward but gold may remain at elevated levels because of its status as a ‘safe haven’ asset in times of economic woes.

India imports 80 per cent of its crude oil demand making it vulnerable to oil prices. High oil prices increase inflationary expectations in India which in turn adversely impacts India’s growth rate. High oil bill is likely to increase fiscal deficit as the Government is unable to pass on fully the rise in international oil prices to consumers. Diesel, LPG and Kerosene are heavily subsidized in India.

With problems persisting in the Middle East, low inventories and lack of spare capacity, crude oil prices may not come down significantly in the near future unless something dramatic happens in OPEC (the body of oil exporters).

The US dollar index (against a basket of six major currencies, like, Euro, Yen and Pound Sterling) is around 74.5. The US dollar has been weakening against these major currencies in the last six months. However, in the last one week, it has shown some resilience and the index has moved up from lows of 72.5 to the present 74.5. The dollar’s overall weakness is pushing up commodities’ prices to some extent.

Global factors

The Dow Jones is at around 11,950 well below 12,000 after reaching a high of 12,800 recently. The S & P 500 is hovering around 1,270 after reaching a high of 1,360. The US indices have been in a bullish range in the last six to eight months. However, the Asian indices have been mostly in bearish territory. The Shanghai Composite (China) is at a low level of 2,700. The Hang Seng (Hong Kong) index is at 22,500 and Nikkei 225 is at a weak level of 9,400. The FTSE 100 and DAX indices are much stronger at 5,770 and 7,080 respectively.

China is going through its own problems. The non performing assets of Chinese banks are expected to go up significantly in the next one year. The central bank there has been increasing interest rates to tackle inflation. China wants its growth rates to slow down a bit to avoid any hard landing. There are concerns of overinvestment and overcapacity in China’s manufacturing sector. Following the global financial crisis of 2007/2008, China had pumped in huge amounts into its infrastructure and manufacturing sector.

Summary

The Indian Government and the RBI have to tackle inflation both from the fiscal and monetary angles. Some economists have suggested that allowing Indian rupee to appreciate against the US dollar may help in containing inflation in India. The data from RBI indicates that it has not been intervening in the foreign exchange market. The Government and RBI have to take both immediate and long-term measures to tackle inflation head on. However, the Government seems to be in some sort of a gridlock embroiling itself in controversies about how to tackle corruption monster. The general impression is that the Government may not be able to push the economic reforms forward in such a situation. The disinvestment programme seems to be in a limbo. The markets have noticed this policy drift and have been expecting further slide in stock indices. Investors need to be cautious at this point of time. As such, it is not a bad idea to hold some cash and wait for a correction and start buying Indian stocks at Sensex levels of between 16,500 and 17,500.