Economy
No growth recovery in sight, says Nomura

Demand remains subdued and supply-side bottlenecks, especially power shortages, remains a constraint, says Nomura Economics Research


Nomura Economics Research has observed the following trends in inflation, growth recovery and government spending based on activity, survey and fiscal data that have been released in the last week:

 

  • Core inflation is likely to moderate: The output price index of India’s manufacturing PMI (Purchase Manager’s Index) fell sharply to a near two-year low of 52.9 in October 2012 from 56.8 in September 2012. Since this is a good lead indicator of WPI (wholesale price index) core inflation (manufactured ex-food), it suggests that core inflation should moderate from November 2012, observes Nomura.

 

  • No clear growth recovery in sight: The manufacturing and services headline PMI numbers were stable in October 2012, but their output components fell further. There is no strong correlation between the quarterly PMIs and quarterly GDP, but the longer-term trends are similar. As such, demand remains subdued and supply-side bottlenecks, especially power shortages, remains a constraint, warns Nomura.

 

  • Government belt-tightening is on: Government spending rose by a paltry 1.4% y-o-y (year-on-year) in September 2012 compared to 20% in the April-August 2012 period. Spending has remained under control in October 2012(as suggested by rising government cash balances, based on Nomura’s estimates). This is unsurprising as tax revenues are likely to be much lower than budget estimates and the only levers available to the government are its asset sales and to contain spending. Nomura’s FY13 (year ending March 2013) fiscal deficit estimate is 5.8% of GDP against the government’s revised target of 5.3%. If this crash diet continues, the fiscal deficit could be marginally lower than Nomura’s estimates, but it is still not likely to fall below 5.5% of GDP.

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India’s manufacturing growth improves in October: HSBC PMI

Inflation as measured by all indices has remained elevated and Wholesale Price Index-based inflation has remained above the RBI’s comfort zone of 5% to 5.5% for past 34 months now

 
New Delhi: India’s manufacturing sector inched up in October 2012, driven by new orders, but persistent power shortages weighed on production, reports PTI quoting an HSBC survey.
 
The HSBC India Manufacturing Purchasing Managers’ Index (PMI)—a measure of factory production—stood at 52.9 in October 2012, slightly up from September 2012, when it was 52.8.
 
The index has remained above the 50-mark, below which it indicates contraction, for more than three years now.
 
The October reading of HSBC PMI points to a further improvement in the health of the manufacturing sector, which witnessed the weakest growth rate in nine months in August.
 
However, going forward, the recovery in manufacturing growth is likely to be ‘slow’, HSBC said, adding that backlogs of work in the Indian manufacturing sector were accumulated at a sharp rate during October 2012, mainly due to persistent power shortages.
 
“Economic activity in the manufacturing sector picked up slightly, thanks to firm new orders. However, insufficient power dampened output growth and led to an increase in outstanding work,” HSBC chief economist for India and ASEAN (Association of Southeast Asian Nations) Leif Eskesen said.
 
On inflation, HSBC said it eased notably with both output and input prices rising at a slower pace in October but it is still likely to stay “elevated for a while”.
 
Input price inflation in the Indian goods-producing sector persisted in October and part of the burden of input cost inflation was passed on to clients as output prices were increased again. However, the rate of inflation was the slowest since November 2010, HSBC said.
 
Inflation as measured by all indices has remained elevated and Wholesale Price Index-based inflation has remained above the Reserve Bank of India’s (RBI) comfort zone of 5% to 5.5% for past 34 months now.
 
In the mid-year monetary policy review on 30 October 2012, the RBI left the key interest rate unchanged but reduced cash reserve ratio by 0.25% to infuse additional liquidity of up to Rs17,500 crore into the system.
 
The RBI kept the repo rate and reverse repo rate unchanged at 8% and 7% respectively.
 
Meanwhile, staffing levels at the manufacturing firms increased, marking an eight-month sequence of job creation.
 
The payroll numbers were raised largely to support new orders growth, the HSBC survey said.
 
This is the second successive monthly expansion in new export orders and new orders increased for the forty-third consecutive month.
 

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