Economy
Current account deficit surges to a record high: Kotak research report

The macro conditions in India remain weak and unless there is a clear effort to contain the fiscal deficit, “animal spirits” of investors could fail to rekindle, says Kotak Economic Research Report

India's balance of payments (BoP) is in difficulty and could be negative into FY-12-13. The overall BoP remained in the red in the fourth quarter of FY11-12 at $-5.7 billion, which pulled the balance of payments in FY11-12 to $-12.8 billion from a positive $13.1 billion in FY10-11. Even as the risk sentiments have suddenly improved on the back of unexpected positive talks from the EU summit, global risk sentiment can once again turn adverse, according to a Kotak Economic Research Report on the Indian economy and its balance of payments.

The current account deficit widened to a record $78.2 billion in FY11-12 (CAD/GDP at 4.2%), mainly on the back of a significantly wider trade gap. Despite the pick-up in capital flows in the fourth quarter of FY11-12 on the back of policy measures (FII inflows and NRI deposits), for the year as a whole, flows were largely stable at $67.8 billion from $62 billion in FY2011.

According to the Kotak research report, typically, the last quarter of any financial year is associated with an improvement in the current account, as invisible receipts rise on repatriation flows. However, this was not the case in the fourth quarter of FY11-12, and the current account deficit widened to a record $21.8 billion (4.5% of GDP) from $20 billion in the third quarter of FY11-12 and $6.4 billion in the fourth quarter of FY10-11. The deterioration came as the trade deficit worsened to $51.5 billion from $48.7 billion in the third quarter of FY11-12, while invisibles were largely stable at $29.8 billion from $28.7 billion in the third quarter of FY11-12.

Merchandise imports continued to remain robust on the back of oil and gold imports, while export growth moderated on weakening global demand, in spite of the increase in competitiveness on account of rupee depreciation.

The fourth quarter of FY11-12 witnessed an improvement in net service exports, but this was offset by a worsening on the investment income. Overall, in FY11-12 the trade deficit widened to 10.3% of GDP from 7.3% in FY10-11 while the current account deficit was at $78.2 billion or 4.2% of GDP.

Given the recent correction in oil prices, Kotak researchers expect the current account deficit to come off its record high as the oil import bill corrects to $144 billion from $155 billion in FY11-12. However, since the drop in crude oil prices is an outcome of weak global growth prospects, export growth will remain muted despite gains in competitiveness from the weak rupee.

The Kotak research report concludes that the macro conditions in India remain weak and unless there is a clear effort to contain the fiscal deficit, "animal spirits" of investors could fail to rekindle, thereby leading to capital inflows remaining on the weaker side. The report estimates capital flows as a proportion of GDP to be at 2.6%, thereby leading to an overall BoP at $-8.4 billion in FY12-13.

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India's manufacturing growth crawls ahead in June: HSBC PMI

HSBC, however, cautioned that going ahead a slight moderation in output is likely as new order growth decelerated slightly, led by export orders amid the sagging global economic situation

 

New Delhi: India’s manufacturing sector inched up in June 2012, as the country saw improvement in business conditions as well as hiring, an HSBC survey said.

The HSBC India Manufacturing Purchasing Managers’ Index (PMI)—a measure of factory production—improved slightly to 55 in June 2012, from 54.8 in May 2012.

A reading above 50 shows that the sector is growing. Below 50, it indicates that the segment is contracting.

“Activity in the manufacturing sector kept up the pace in June with output and employment expanding at a faster pace,” HSBC chief economist for India & ASEAN, Leif Eskesen said.

In order to accommodate higher levels of output, manufacturers hired more workers in June, this year.

HSBC, however, cautioned that going ahead a slight moderation in output is likely as new order growth decelerated slightly, led by export orders amid the sagging global economic situation.

June PMI data also signals continued inflationary pressures in India’s manufacturing sector as input and output prices rose at a faster pace than in May, keeping inflation high by historical standards.

Output prices increased as manufacturers attempted to pass the rise in the cost of inputs on to their clients.

Moreover, charges also increased in line with more expensive labour costs, HSBC pointed out.

“In light of these numbers, the Reserve Bank of India (RBI) does not have a strong case for further rate cuts, which could add to lingering inflation risks,” Mr Eskesen said.

In its mid-quarter monetary policy review on 18 June 2012, RBI chose to leave key interest rates on hold.

Meanwhile, the Indian economy is grappling with slow growth and high inflation rates.

India’s economic growth rate slowed to a 9-year low in March quarter at 5.3%, and 6.5% for the entire 2011-12 fiscal. The 2011-12 growth was lower than 6.7% seen in 2008-09 amid the height of global financial crisis.

India’s wholesale inflation was 7.55% in May 2012. At the retail level, the Consumer Price Index (CPI) inflation for May was 10.36%.

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Godrej Properties ropes in global investors for fund to develop new projects

Godrej Properties and investors will bring in equity at a ratio of 29:71 and share the profits in the same ratio, the company said in a release

 

Godrej Properties (GPL), a major real estate player, has roped in global investors to launch a fund to develop residential properties in India. Dutch pension services provider APG and Sparinvest Property Fund II have invested in the fund to develop three to five residential properties in Mumbai, NCR, Bangalore, Pune and Chennai.

GPL and investors will bring in equity at a ratio of 29:71 and share the profits in the same ratio, the company said in a release.

“The platform will enable GPL to capture outright land purchase transactions in currently dislocated market conditions without deviating from its asset light model and is expected to generate substantial earnings over the next seven years, which will contribute significantly to the company’s growth,” GPL said in a release.

Commenting on the development, Pirojsha Godrej, managing director and chief executive, Godrej Properties said, “We are excited about this association with a global investor group led by APG, which will enable GPL to source deals with large capital requirements in our focus markets of Mumbai, NCR and Bangalore. This is an important growth opportunity for GPL which will allow us to extend the number of projects in our portfolio while maintaining our capital efficient land sourcing strategy.”

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