India's GDP Showers turning to storms
Taking the heat out of India's economy THE monsoon reached India on May 31st, dousing Kollam, a city in Kerala, in 19cm of rain. Good rains once guaranteed an economic boom in India, but that was in a simpler time. According to figures released a day before, India is now a $1 trillion economy, valued at market exchange rates. Farming, forestry and fishing accounted for less than 18% of the total. But it still pays to keep half an eye on the clouds overhead. India's growth for the fiscal year ending on March 31st was revised up to 9% because agriculture did better than first thought. And if the monsoon meets expectations, the country may produce a record crop of grains this year. That should help ease the price of food, which has contributed to a marked rise in inflation (now at 8.1% according to the wholesale-price index). The skies offer no relief for the soaring cost of fuel, however, which is threatening to rob the central bank of its inflation-fighting credentials, undo the government's fiscal progress, and cost the Congress-led coalition the next general election, due by May 2009. To keep the voters happy, the government stops state-owned oil firms from passing on the higher cost of crude to their customers, compensating the firms with government-backed oil bonds. But those bonds are a growing fiscal burden. On June 4th the government modestly raised the price of petrol and diesel. It also cut import duties on fuel. That will stem the refiners' losses somewhat, but also add to the inflation that is angering voters. It now falls to the Reserve Bank of India (RBI), the central bank, to stop inflation expectations rising. The RBI has promised to "act decisively, effectively and swiftly". But it is caught between competing objectives. It thought it had won the battle against inflation, which fell as low as 3.1% in October, and had turned its attention to the rupee, which was then uncomfortably strong (see chart). Its successful efforts to suppress the currency, by printing rupees and buying dollars, has made fighting inflation that bit harder. Perhaps a slowdown will do the RBI's job for it. The OECD has forecast growth of 7.8% this calendar year. But so far the weakening is not showing up in output figures. Despite a slowdown in manufacturing, the economy grew by a surprisingly strong 8.8% in the year to the first quarter. The stockmarket, on the other hand, has lost about a quarter of its value since its peak on January 8th. Foreign institutional investors, who swept the market off its feet last summer, dumped shares in January and again in May. India's regulators, anxious to rebuff foreign admirers last year, are now inviting them back, allowing Indian companies to borrow more abroad and some foreigners who are not registered with the authorities to open "sub-accounts" with brokers who are. India's equities were due for a fall, having reached valuations of over 28 times earnings at their peak. But the bearishness may also reflect a deeper concern that India's remarkable run is coming to an end. Inflation will take some beating and the country's fiscal termites are gnawing once again. It is not just the oil subsidies. The government is committed to raising the pay of millions of civil servants, and as the rains fall on the fields, it has promised to erase farm loans worth about 710 billion rupees. The combined budget deficit, including the states, may reach 9.4% of GDP this fiscal year, according to Morgan Stanley. Nine percent of $1 trillion is a very big number indeed. Disclaimer : Information transmitted in this e-mail is proprietary to KARVY Group of companies. It is intended only for the addressee and may contain private, confidential and/or privileged material. Views contained in the email message are those of the sender and may not necessarily reflect those of Karvy. Review, retransmission, dissemination or other use of this information by the person other than the intended recipient is strictly prohibited. If you have received this communication in error, please contact the sender or notify [EMAIL PROTECTED] <mailto:[EMAIL PROTECTED]> and delete the material from any stored format/computer.
