India Economy – March 2013

Source: OPEC 4/13/2013, Location: Asia

According to EIU (March 2013) the perception of both current and future economic conditions worsened in the 4Q12. Around 41% of those surveyed felt that current conditions were worse than a year ago, up from just under 39% of those surveyed in September. More worryingly, nearly 32% of respondents believed that economic conditions would worsen in the next 12 months, compared with 28% in the previous quarter.

However, the outlook for income and households improved slightly: when questioned about their household circumstances, 46% of respondents thought that these would improve in the coming year, up from 44.1% in September, while 54.5% felt that their income would rise, compared with 51.9% previously. A slim majority of consumers (51.5%) anticipated increased future expenditure, compared with 57.9% in the 3Q. According to the survey, the cost of services and durable goods were the most commonly cited factors influencing changes in spending.

In January, India's automotive industry recorded its worst performance in almost a decade as car sales fell by 12.5% y-o-y to 173,420 units, according to data released on 11 February by the Society of Indian Automobile Manufacturers (SIAM). This marks the third consecutive month that car sales have fallen, after an average decline of 10.4% y-o-y in November-December 2012. Meanwhile, sales of vans were 5.9% lower on an annual basis in January, while total sales of commercial vehicles fell by 9.5% to 63,218 units. However, SIAM noted that overall vehicle sales grew by 5.3% to 1.56 million units in January. Overall, car sales in the first nine months of fiscal year 2012- 13 (April-March) fell by 1.8% y-o-y, even as overall passenger vehicle sales grew by 6.8% in the period, largely driven by sales of utility vehicles.

Even though the government kept to its fiscal targets in late February, there were no bold measures to restore macroeconomic stability and boost growth by spurring infrastructure investment. Boosting infrastructure investment and household financial savings, and inducing more capital flows to fund the current account deficit, were rightly seen as key imperatives in many economic surveys.

However, the budget laid out several measures. On infrastructure, it indicated tax-free bonds of Rs 500 billion (0.4% of GDP) will be permitted this year. In addition, Infrastructure Debt Funds (IDF) are to be encouraged and a regulatory authority for the road sector is to be introduced. More generally on the investment side, companies will be able to deduct an investment allowance of 15% on investments on plant and machinery. And on the savings side, the Rajiv Gandhi Equity Savings Scheme (which offers incentives for first-time equity investors below a certain income level) was liberalized. The government’s budget also said the government would introduce inflation-indexed bonds in the near future and proposed the creation of a policy framework to help accelerate coal production, which has been a key constraint for the power sector.

While there have been steps in the right direction, it seems they are not bold enough or comprehensive enough to boost savings or investments. Furthermore, there was almost nothing in the budget on the external side, with no mention of rationalizing withholding taxes, floating a rupee-denominated bond or generally attracting more capital flows in lieu of the bloated current account deficit. The wholesale price index (WPI) inflation is expected to moderate further, but CPI is to stay elevated. Year-onyear industrial production growth has languished in recent months, but this has masked a sequential uptick in the industry that was evident in the 4Q GDP growth rates. Markets are closely monitoring whether this continues into January IP. Exports rose sharply in January and would need to stay on that trajectory to help narrow an unsustainably high current account deficit (see table on macroeconomic performance of BRIC above). Yet there has been news of export orders stumbling in the last few months.

The events of the last few weeks have increased expectations that there will be another 25 bp policy rate cut in March. First, January headline and core inflation surprised sharply on the downside and the momentum of core inflation has fallen all the way to 2% on a quarterly basis. Nevertheless, CPI inflation is still in the double digits and core CPI inflation is at 8% but this has not been a deterrent to previous rate cuts, with the Reserve Bank of India (RBI) using WPI inflation as its key metric to assess pricing power. Second, the pace of activity remains well below the trend. It seems clear that GDP growth accelerated in the 4Q12, but the output gap is still thought to be negative.

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