India's Economic Scenario

Seeing the bear messages here, I am starting this thread, Mostly I will cut/paste info from the net with comments in between.


(Bloomberg) -- India's government expects economic growth to slow for the first time in three years, as higher interest rates cool consumer demand for homes, motorcycles and electric appliances.

Asia's third-largest economy is forecast to expand 8.7 percent in the 12 months to March 31, the weakest pace since 2005, the statistics office said in a release in New Delhi today. Growth was 9.6 percent last financial year.

The pace of expansion will still be the quickest after China among the world's major economies. And it may remain so even if the U.S. suffers a recession as India's growth is being driven by the spending of a middle class of about 50 million people, equal to the combined population of Singapore, Hong Kong, Malaysia and Australia.

``This is not a collapse,'' said Sonal Varma, Mumbai-based- economist at Lehman Brothers Inc. ``Growth is slowing because of higher real interest rates. U.S. recession or not, the structural drivers of India's rising potential growth remain intact.''

The government's growth estimate beats the central bank's 8.5 percent forecast and is almost in line with the average 8.8 percent annual growth in the previous four years, the best expansion since the country's independence in 1947.

Final Figure

Finance Minister Palaniappan Chidambaram who said he was ``disappointed, but not too despondent,'' expects the final growth figure to be closer to target.

``Growth will be closer to 9 percent than what may appear at this moment,'' Chidambaram told reporters in New Delhi today.

Reserve Bank of India Governor Yaga Venugopal Reddy has raised interest rates nine times since October 2004 and ordered banks to set aside more money as reserves five times since December 2006 to contain inflation stoked by rapid consumer demand and high oil and food prices. The central bank has also allowed the rupee to strengthen to near a decade-high to make imports cheaper.

Six of nine economists surveyed by Bloomberg News last week said Reddy will maintain the repurchase rate at 7.75 percent, the highest in six years, in the next monetary policy statement on April 29, as inflation still doesn't reflect last year's 57 percent increase in crude oil costs.

Inflation Rate

Inflation, currently at a five-month high of 3.93 percent, may also accelerate on increased money supply caused by capital flows from overseas investors, seeking higher returns in India, where growth is almost three times that in the U.S., Europe and Japan. Only China among economies of more than $500 billion grew faster than India, at an 11.2 percent pace last quarter.

Global investors bought a record $17.2 billion of shares and $2.3 billion of bonds in India last year.

Higher interest rates have reduced demand in some segments of the Indian economy. Property prices, for example, have declined. The value of residential flats in Gurgaon, a suburb outside the capital New Delhi, have dropped 40 percent in the nine months ended Sept. 30, according to real estate company Cushman & Wakefield Inc.

India's manufacturing is expected to expand 9.4 percent this fiscal year, according to today's statement. Agricultural output may grow 2.6 percent and financial services will advance 11.7 percent. Bajaj Auto Ltd., India's second-largest motorcycle maker, posted a 7.2 percent drop in sales in December, its 11th straight month of declines.

`Consumption Growth'

``Rising incomes should support consumption growth,'' Andrea Richter Hume, an International Monetary Fund economist, said in a report on India this week. The IMF expects the South Asian nation to grow at 8 percent ``over the next few years.''

India's middle class, those with annual disposable incomes between $4,380 and $21,890, has more than doubled to 50 million in the past decade, according to McKinsey & Co., the New York- based consulting firm. It estimates this group will further increase 10-fold to 583 million people by 2025.

Incomes are rising in India because of a spurt in economic growth after Prime Minister Manmohan Singh started dismantling barriers to foreign investment and other Soviet-style controls on industry when he was finance minister in 1991.

India's economy has expanded at an average annual pace of 6.3 percent since 1991, compared with growth of about 3.5 percent between 1950 and 1980.

That acceleration in growth is attracting companies such as Glitnir Bank hf, Iceland's third-biggest lender by market value, and McDonald's Corp. to India.

`Perfect Time'

``We think this is the perfect time for us to come to India,'' said Bala Kamallakharan, executive director at Glitner, which yesterday unveiled an Indian joint venture with the LNJ Bhilwara Group to produce thermal energy.

Glitnir is not alone in trying to tap opportunities in India. McDonald's, the world's largest restaurant company, last month said it will boost its stores in India this year by as much as 30 percent.

Volvo AB, the world's second-largest truckmaker, plans to create a joint venture with India's Eicher Motors Ltd. to win a larger share of the fourth-largest truck market, the Swedish company said in December.

New Delhi, Feb. 5 The Centres direct tax revenues continued to be buoyant, with net direct tax collections recording 40.47 per cent increase for the ten-month period April 2007-January 2008 at Rs 2,18,538 crore (Rs 1,55,576 crore).

Corporate tax registered a growth of 37.54 per cent at Rs 1,33,851 crore, up from Rs 97,315 crore during the previous fiscal. Personal income-tax (including FBT, STT and BCTT) grew by 45.45 per cent at Rs 84,349 crore, up from Rs 57,990 crore.

Growth in Securities Transaction Tax (STT) was 85.71 per cent (Rs 6,793 crore against Rs 3,658 crore) and Fringe Benefit Tax (FBT) was 30.74 per cent (Rs 5,161 crore against Rs 3,948 crore). Banking Cash Transaction Tax (BCTT) grew by 14.51 per cent (Rs 460 crore against Rs 401 crore).

An official release said that the overall direct tax growth was highest in the Mumbai region at 64.26 per cent; followed by North Western region (Chandigarh) at 48.19 per cent, Pune at 44.37 per cent, Karnataka and Goa regions (Bangalore) at 43.76 per cent and Andhra Pradesh (Hyderabad) at 39.53 per cent.

Corporate tax growth was highest in the North-East (Guwahati) at 254.30 per cent; followed by Bihar and Jharkhand regions (Patna) at 75.45 per cent, Kerala region (Kochi) at 71.61 per cent, eastern Uttar Pradesh (Lucknow) at 71.46 per cent and Mumbai at 69.90 per cent.

Personal income-tax growth was highest in Madhya Pradesh and Chhattisgarh regions (Bhopal) at 393.07 per cent; followed by Mumbai at 54.48 per cent, part of western Uttar Pradesh (Meerut) at 52.91 per cent, Andhra Pradesh (Hyderabad) at 49.97 per cent, eastern Uttar Pradesh (Lucknow) at 48.84 per cent and Tamil Nadu (Chennai) at 48.41 per cent.

Even in a US recession, India's growth is unlikely to fall below 7%. At 7 per cent GDP growth, 5 per cent inflation, small volume increase and proper execution could lead to an earnings growth of nearly 15 per cent in FY09 over FY08. This would be commensurate with a broad market PE of 16-17 that too without a flourish.

No US recession = Risk of overheating in India

Our house view is that the US economy will avoid a full-blown recession, but is in for an extended period of lackluster growth. Under this scenario, we expect India's exports and overall economic activity to slow, but not collapse.

If the US Fed cuts rates by a further 100bp to 2.00% by June and averts a major recession, we expect India to attract massive capital inflows, leading to heavy FX intervention by the RBI to avoid excessive rupee appreciation.

Massive capital inflows would make it more difficult for the RBI to raise interest rates, as doing so risks attracting more capital inflows.

Hence our core view is that the RBI will keep interest rates unchanged, even though the inflation risks are skewed to the upside and the danger for India's economy is overheating.

Major US recession = Sub-8% GDP growth for India

In the event of a major US recession, besides a larger hit to Indian exports, there could be serious second-round effects, as firms scale back capex and jobs. The negative impact on
the economy from the financial and confidence channels would also be powerful.

Global risk aversion could rise, causing a reversal of capital inflows.

The 1982 and 2001 US recessions suggest that a 1pp drop in US GDP growth can shave 0.1-0.3pp off India's non-agriculture GDP growth. A recent Asian Development Bank study estimates that the same magnitude drop in US GDP growth would subtract 0.8pp from Asia ex-Japan's growth.

The size of the impact on India probably lies somewhere in between since India's economy is rapidly opening up to the world, but it is still among the least open in the region.

It's not just about what US slow down does to India. It is also what US slow down does to China and hence Indo-China or India-Japan trade. You cannot sustain a 8.5% growth by ignoring exports.

We have a long way to go till we become a export dominated economy like china, our exports are very less compared to china, we are more of a self dependent economy.

The key challenge facing India is to sustain rapid and inclusive growth, foster job creation and maintain macroeconomic and financial stability in the context of large capital inflows, says the IMF. It expects India's economy to expand by 8.34 percent this fiscal.

'India's favourable outlook has attracted record capital inflows, which help finance investment but also present challenges to managing capital markets integration,' the International Monetary Fund (IMF) said Monday.

In its assessment after annual bilateral Article IV consultations with New Delhi Jan 23, the IMF Executive Board commended India's outstanding economic performance and its success in reducing poverty, calling it a tribute to its sound macroeconomic policies and structural reforms.

India's economy has been resilient in the face of heightened global uncertainties, slowing US growth and high world oil prices, and is expected to expand by 8.34 percent this fiscal year as a result of rising productivity and investment, it said.

IMF endorsed India's policy priorities, which are to manage financial globalisation and tackle supply constraints through an enhanced monetary framework, financial sector development, fiscal consolidation and removal of structural bottlenecks.

Commending India' success in containing inflation and maintaining domestic financial stability, the board observed that large capital inflows have exacerbated tensions among exchange rate stability, monetary independence and financial openness.

The directors supported the central bank's active management of liquidity and accommodation of increased exchange rate volatility, while noting the appreciation pressures on the rupee.

They concurred that rupee appreciation reflected strong fundamentals and increasing productivity, and saw the policy of a managed float as remaining appropriate.

A number of directors, however, expressed concern that rupee appreciation has adversely affected India's external competitiveness in certain labour-intensive sectors, the IMF assessment said.

They supported New Delhi' cautious and pragmatic approach to managing capital flows, including through temporary capital controls, while commending its intention to move to fuller capital account convertibility gradually over the medium term.

Some directors also cautioned against restrictions on capital inflows, emphasising that increased exchange rate flexibility, strengthened monetary operations, and more effective communication with markets could be a better way to increase monetary policy effectiveness in a more financially open environment.

Directors emphasised that broader and deeper financial markets could better intermediate capital inflows, accommodate exchange rate volatility, and support financial stability and economic growth.

They encouraged policy makers in India to press ahead with developing domestic corporate bond and derivatives markets, and to implement more market-based monetary operations. Enhancing banks' efficiency can also improve financial intermediation.

IMF welcomed the Reserve Bank of India's (RBI) focus on preserving financial stability through close scrutiny of banks and efforts to improve banks' risk management.

While commending the overall soundness of the financial system, IMF called for continued vigilance, particularly in light of the rapid growth of real estate credit.

It welcomed the forthcoming implementation of the Basel II supervisory framework, and looked forward to the publication of the authorities' self-assessment of financial stability and development.

On the fiscal front, IMF welcomed the continued buoyancy of tax revenues, but noted that with public expenditure and debt still relatively high, more rapid fiscal consolidation is warranted.

A tighter fiscal stance could also help offset the liquidity impact of buoyant capital inflows and thus relieve appreciation pressures. IMF stressed that expenditure reforms are needed to create space for priority spending.

IMF also noted the growing fuel subsidy burden and the need to adapt to higher international oil prices through a phased reduction in subsidies for most fuel products, while ensuring that adequate and well-targeted safety nets are in place to protect the poor.

Welcoming plans for a national goods and services tax, it noted that cutting tax exemptions, increasing user fees and further improving tax administration would improve the tax base.

IMF urged greater progress in structural reforms to ease real sector rigidities, boost productivity and competitiveness, and ensure that the benefits of growth are widely shared.

It concurred with the priorities identified in the government's 'inclusive growth' agenda: bridging infrastructure gaps with private sector participation, ensuring access to social services, and promoting a competitive environment that supports private sector investment and job creation.

Toward these goals, IMF emphasised that more flexible labour regulations can facilitate the reallocation of labour to stronger sectors, while higher and more effective public spending on education is needed to address the skills gap.

I don't have the numbers with me but there is no way a country can grow 9% without increasing exports. Exports are not just goods, they can also be services like technology, call centers, etc.

I'll try to compile the numbers and will post them here over a period of time supporting that our country can grow at a rate of 8% this year.
US is a major player in the world but it is not the only one and it does not control the whole world and I am very certain our Country will show the world that very thing, ours is the time and it has come and it is now. We will witness a global shift in power in world economies in the next 5-7 years. Wait and Watch.

jnj,
I agree with you on India's future but a global shift is not always easy. The last time a global shift happened in the late 1920s. That was when the US took over from Britain which sent the world through a depression. A global switch does come with a price.

I will wait for your numbers. My stance is that a self contained economy cannot grow at 9%.

Manufacturing still going strong: CII survey

Out of a total of 100 sectors reporting production, 15 reported excellent growth rate of more than 20% and 30 sectors recorded high growth rate of 10-20%. 41 sectors recorded a moderate growth rate of less than 10% and 14 sectors recorded negative growth rate. The percentage remained the same for moderate category while percentage of sectors in negative category showed a slight decline for the first nine months of the current fiscal year. The percentage of sectors in excellent category has declined while percentage of sectors in high growth category has increased.

There is an urgent need to address the issue of high interest rates, reduced credit availability and rupee appreciation, according to the CII. This year has seen a slowdown due to these factors, it added. -> [B]THIS IS MORE IMPORTANT FOR THE GOVERNMENT TO BE BOTHERED ABOUT RATHER THAN US RECESSION.[/B]