Economy
Expansion cycle soon, predicts Morgan Stanley
According to Morgan Stanley, India is one of the few EM economies that has already undergone a period of adjustment to improve its macro stability and is making steadfast progress towards improving the growth mix and productivity
 
India's gross domestic product (GDP) growth is likely to accelerate gradually and inflation to remain below 5% over the next two years. According to Morgan Stanley, this will be a longer duration expansion cycle for India with low risks of overheating in the next two years considering the overall policy approach of government and Reserve Bank of India (RBI).
 
Morgan Stanley, in a research note said, "India is one of the few EM economies that has already undergone a period of adjustment to improve its macro stability and is making steadfast progress towards improving the growth mix and productivity dynamic. In our view, India stands out as EM growth is likely to be below its 30-year average and a large number of EM economies are still in adjustment phase. India is also one of the few Asian economies that is not facing a high level of debt and demographics issues."
 
 
Revising India's growth estimates marginally to 7.5% for FY2016 from 7.9% earlier and 8.1% for FY2017 from 8.4% earlier, the report says it is in line with the growth trajectory due to bad weather and weak external environment. "Growth trend is showing initial signs of recovery with pick up in capex and discretionary consumer spending. However, the continued weakness in external demand and slowdown in rural consumption spending with cuts in the government’s redistribution policies are holding back the pace of recovery. Moreover, the recent weakness in rainfall trends has raised concerns on agriculture output growth, with related repercussions for rural consumption," Morgan Stanley said.
 
 
According to the report, over the last three years, India has been taking up macro adjustment policies to improve macro stability and the productivity environment in a sustainable manner. It says, "Policymakers pursued tight fiscal as well as monetary policies. In past cycles, India has had the advantage of managing these adjustment cycles better with support of exports (like in 1998-99 and 2003-04), which helped it to step out of the adjustment phase faster. Hence, we believe that the growth recovery will be slow and largely premised on domestic demand."
 
 
Morgan Stanley expects India's GDP growth recovery to be driven by a pickup in capex, more public than private, urban consumption and stabilization of exports i.e. not continuing to contract. However, the pace of policy actions to revive productivity dynamic, strength of external demand recovery and trend in capital inflows into emerging markets are the factors that will influence the growth outlook, Morgan Stanley warned.
 

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China slowdown historic opportunity for India: Arvind Subramanian
Pointing to investment from companies like Foxconn of Taiwan and Xiaomi of China, Chief Economic Adviser (CEA) Arvind Subramanian on Tuesday said the slowdown in China is a "historic opportunity" to relaunch growth in India.
 
"China slowdown is a historic opportunity for India as Chinese production becomes less
profitable, India could become profitable but not guaranteed," Subramanian said while delivering a talk at the Institute of Chinese Studies here.
 
"India is a net importer, so China slowdown is an opportunity to relaunch growth in India," he said, adding that companies based in China might now view India as a hedge against the slowdown.
 
In a move to deal with current economic weaknesses, the Chinese central bank lowered its daily reference rate by 1.9 percent last month, rocking currency markets globally and affecting the rupee.
 
Commodities, particularly oil, that was under pressure for several months, slumped following an 8.5 percent decline in the Shanghai Composite Index last week. China is the world's second-largest consumer of oil after the US.
 
Speaking about the recently devalued Chinese Renminbi, the CEA said India has an unambiguous interest in supporting China's currency become the part of Special Drawing Rights (SDR) basket, or the supplementary foreign exchange reserves maintained by the International Monetary Fund.
 
"On the Renminbi, I think we have an unambiguous interest in supporting the Renminbi
becoming the part of SDR basket, because essentially as the Chinese currency becomes more and more international, China will have to open up its economy which is good for the world, good for China," Subramanian said.
 
"And also China will be less able to manipulate its currency, keep it low, which could be disadvantageous for China. So we have a strong stake in that the Chinese currency becomes internationalised," he added.
 
He said China should be able to get the geo-political benefits issuing from its currency becoming more international because the concrete economic result would be both an opening up and a tighter linking of the Chinese economy.

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COMMENTS

Anil Agashe

2 years ago

Another case of optimism. I wish he and others in government please tell us what they are doing to make this happen. Indian industry supports "Make in India" in seminars organized by their own trade bodies and continue to import from China, saying but we have to protect our bottom lines!

Indian Export Performance - is it that bad?
It is entirely possible, that volumes of some of our export items are actually going up, but it is not being reported because prices are down by much more
 
A lot has been written, discussed and debated over the monthly Indian export numbers, which have been falling for the last 8-9 months. In most months, it has been a double-digit decline. Sometimes the fall has been as high as 20%. Obviously, it does not look or feel good. It has been linked to how bad the situation is for the manufacturing sector and how, in general, the industry is not doing well.
 
To sum it up, the situation is bad. Or, is it that the situation "looks" bad?
 
To do a broad-level analysis, I am using the April-June 2015 exports numbers. Whether we can extrapolate that analysis to the whole of the last nine months, or not, can be debated, but I am hoping it gives a sense, at least.
 
The table below gives the export numbers for April-June 2014/2015 with a break-up of different heads or businesses.
 
Table 1
 
Exports for the period have fallen by about 16%, which is around $12.8 billion in absolute terms.
 
The numbers have been given under 21 different heads. But it would be too much to go into the details of each of them. So, we restrict to the top heads, which account for most of the fall in exports.
Let us have a look at them in brief.
 

Petroleum 

 
Let us get to the Big Daddy first. Exports numbers are down from $16.7 billion to $8.2 billion. A fall of 51%. This is $8.5 billion out of the total drop in exports of about $12.8 billion calculated above.
 
If one goes by the data available on the Petroleum Planning and Analysis Cell (PPAC) website, about 80% of this fall can be attributed to the steep fall in crude oil price itself (which is of the order of 45% y-o-y).
 
And it would not be outrageous to suggest that the volume drop is also a big function of how the demand behaves in the face of deflation (i.e. some temporary postponement of purchases). It is likely that a big chunk of the lost volumes maybe recovered later.
 
Petroleum products are all about refineries. How does this 51% fall in exports affect refineries?
 
Refineries work on the gross refining margin (GRM) basis, which is basically spread between crude price and price of derivatives like petrol and diesel. As long those spreads are in the acceptable range or have not changed much (in fact, most refineries have done very well on the GRM front in Q1 FY16), it would not materially affect them. Volumes do affect them, but there is a big possibility of recovering those later.
 
In fact, some of those export volume drops will also be a function of growing local demand. Refineries have not expanded majorly and any growth in local demand means there is that much less to supply on the exports side.
 
Net net.... I would think...effect of this reported 51% fall in petroleum exports is far less (almost negligible) than what the number suggests. (Inventory losses, if any, are out of scope for the topic of discussion).
 
And this drop in petroleum exports is 2/3rd of the total drop in exports reported for the April-June 2015 period.
 

Agri and Allied Products

 
The second biggest contributor to the export fall in absolute terms in this period. It is about $1.8 billion.
 
Have a look at the top contributors to the fall within the head:
 
Basmati Rice is again a case, where the price of product itself has gone down in the range of 20%-30%. So, there should be no surprises, if the export value goes down by something similar.
 
I am no agri-expert, but should it surprise, if in a year with poor monsoon and stagnant or falling production of most agri-products, their exports are down?
 
This has mostly to do with monsoon and its effects rather than any structural issues, whether policy-wise or demand-wise. There are a lot of other agri-products, whose exports have fallen where reasons are likely to be the same and have contributed to the overall fall.
 
This number of $1.8 billion is about 14% of overall fall of $12.8 billion. So, we have discussed about 80% of the fall in export numbers. There are many other heads under which exports have fallen.
 
For example, gems, jewellery, base metals, ores, minerals, plastics, and textiles. These individually may contribute $100-500 million to fall in exports. Again, most of these sectors have their basic commodity facing deflationary pressures and thus obviously have reported falling turnovers.
 
It is not clear if this rough analysis can be extended across the year or to the previous 9 months, but the broad story behind the decline of exports is unlikely to change much.
 
This analysis is also not to suggest that there are no difficult spots or industry situations at all. There will surely be some of them. But they are not the ones contributing in a major way to the export numbers or their decline.
 
There is also no denial that given our share of global exports, we should do far better than be happy with stagnant volumes.
 
However, the image that is created by a 15% or a 20% fall in exports is probably not the reality. It is not as if overall export volumes are crashing at that rate and industry is suffering. It is entirely possible, that for some of them volumes are actually going up but it is not getting reported because prices are down by much more.
 
A lot of deflation and its effects are being built into the numbers. These, obviously are contributing towards creating a base, which few months down the line, will probably make the export numbers look very decent on a y-o-y basis.

 

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COMMENTS

Manoj

2 years ago

Thank you for analyzing the numbers for us. Educative. Would you like to add if government is focussing on exports at all, or is it trying to get investments into india & build up local supply chains? What is your view of the future

Anil Agashe

2 years ago

So the writer should actually say that demand for more incentives and subsidies for this sector are not called for!
The truth is that we have not been able to find new markets and we wish to continue with traditional markets only.
On prices going down it is also more true of imports.
I am unable to understand why the CAD is not declining in this case?

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