Economy
Economy & Nation Exclusive
What we forgot in the buzz of reforms 1—Inflation in India is headed higher

The nation has been gripped by rapid-fire economic reforms unleashed by the Congress-led UPA government. But a lot of these recent measures will lead to higher inflation in India, dimming the hope of cheaper credit and higher growth

Over the last few days, the government has announced a slew of reform measures such as foreign direct investment (FDI) in retail, aviation and broadcasting as well as diesel price hike and capping the number of LPG gas cylinders per consumer per year. However, this will not alleviate the immediate drag on the economy—interest rates, which have remained high—partly because inflation in India is running high. According research by Standard Chartered Bank, “notwithstanding recent exuberance on the fiscal reform front, we have raised our fiscal deficit and inflation forecasts for FY13 (ending March 2013). We believe that the government’s recent larger-than-expected revision of fuel prices and the delayed onset of the monsoon rains will push inflation in India higher.”

 

The bank had raised its average FY13 inflation forecast to 7.6% y-o-y (year-on-year), after factoring in the impact of delayed monsoon rains on food inflation in India. Since then, three important changes have pushed its FY13 average inflation forecast to 7.8%.

 

It increased retail fuel product prices after a gap of one year by 12%. It also limited the supply of subsidized cooking gas to six cylinders per household per year. This implies a 22% price increase, assuming that each household needs at least eight cylinders a year. The government also reduced the petrol excise duty by 7.5%. According to bank, “the direct impact of these revisions is equivalent to 70 basis points (bps) of inflation and is likely to push headline inflation in India above 8% in next few months. While our initial 7.6% average forecast incorporated some rise in fuel product prices, the government has been more aggressive than we expected.”

 

Inflation in primary articles was lower than expected in July and August because of lower price of fruit and vegetable. But given “insufficient monsoon rains, we expect fruit and vegetable prices to move higher eventually. Indeed, July CPI (consumer price index) inflation in India showed a 7.9% m-o-m increase in vegetable prices versus a decline of just 5.9%. Thus, the probability remains of future revisions to this series.” The bank also reminds that “inflation in manufactured products increased sharply to 6.14% in August from 5.4% in June. The index rose a further 0.8% in August, after a 0.6% rise in July. Core inflation edged up to 5.6% y-o-y in August from 5.44% the previous month. Price pressures exist across the board but are most notable for sugar (+8% m-o-m) and cement (+ 2% m-o-m). Since these price changes have driven the index to higher levels, the impact on headline inflation will be felt for the rest of FY13.”

 

The impact of all this is no cuts in interest rates. The bank notes that “in its recent monetary policy statement, the RBI highlighted persistent inflationary pressures and noted the upside pressure from high global commodity prices and India’s still wide fiscal and current account deficits. It made it clear that managing inflation remains its priority.”

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COMMENTS

MOHAN

5 years ago

The following will be the News CNN IBN likely to broadcast a few years after Wal-Mart enters India.

( CNN - IBN changes its name. Now it is called CNN - KALAVATI )

This is CNN -IBN broadcasting live from its headquarters at Bhatta Parsaul

Headlines

Rolls Royce opens its first ever mega show room in India at Nandigram in West Bengal. CEO of Wal-Mart India, Mr. Montek was present on the occasion.

Large queues were seen in front of Raymond show room across Indian metropolitan cities, especially in "Erumapetty" in Tamil Nadu, Nargundu in Karnataka, Jadchrala in Andhra Pradesh, Podiya in Orissa, Dantewada in Chhattisgarh on the occasion of Holy. The police had to be called in to control the mob. The Raymond dealer at Singur in West Bengal said that he had to close the show room as there was scarcity of "SUITING MATERIALS AND NECKTIES".

In the meanwhile, the CEO of famous underwear brand Jockie lamented that their company is passing through a very difficult time. He said that the rural rich still prefer Indian ties under their costly trousers. He requested the Nobel Laureate Mr. Vivian Fernandez, who won the Nobel Prize for his research on "Pepsi assisted farming" in Punjab, to intervene in this matter. Mr. Fernandez assured him that he will meet Prime Minster Rahul Gandhi and request him to levy an excise duty of 53.5% (advalorem !) for the Indian ties in order to discourage the rural rich from wearing the Indian tie.

The Indian MULTI- national Tata Motors is coming out with a new model with a MULTI-jet diesel engine. A top executive of TATA Motors said "We will be soon selling our cars through MULTI-brand retailer Wal-Mart. We also had talks with MULTI- level marketing company Amway". But since they cannot enter into Andhra Pradesh we have decided not to proceed further !




MOHAN

5 years ago

Rapid-fire reforms will lead to higher inflation ? !Oh No !

Call Walmart! Save India!



S&P cuts India's growth forecast to 5.5% for FY13

S&P said lack of monsoon has affected India. In addition, more cautious investor sentiment globally has seen potential investors become more critical of India's policy and infrastructure shortcomings, the ratings agency said


New Delhi: Ratings agency Standard and Poor's (S&P) has lowered its growth forecast for India to 5.5% for this fiscal, from 6.5% projected earlier, citing "volatile" global economic situation and lack of monsoon, reports PTI.

 

"The lack of monsoon rains has affected India, for which agriculture still forms a substantial part of the economy. Additionally, the more cautious investor sentiment globally has seen potential investors become more critical of India's policy and infrastructure shortcomings," said Andrew Palmer, credit analysts, S&P.

 

According to S&P, Asia-Pacific is feeling the pressure of ongoing global economic uncertainty and it has lowered India growth forecast by one percentage point to 5.5% for this fiscal from 6.5% earlier.

 

Moreover, "global investors have become more critical of India's policy and infrastructure shortcomings which was recently highlighted by the power outage in early August that affected 20 of India's 28 states," the report added.

 

The report, however, did not mention anything about the recent reforms push by the Indian government.

 

Last week, the government effected a steep 12% hike in diesel prices and capped subsidised cooking gas to consumers. Besides, it allowed foreign direct investment (FDI) in multi-brand retail, aviation, broadcasting and power exchanges.

 

S&P said Asia Pacific economies are witnessing cautious growth conditions and any worsening of the economic conditions in the euro-zone will increase contagion risk for the region as these economies are "sensitive" to capital flows and trade.

 

"A trifecta featuring a slowdown in China, ongoing troubles in the Eurozone, and a weaker recovery in the US leads us to forecast slower economic growth rates for Asia Pacific," S&P said.

 

According to S&P credit analyst Andrew Palmer, "Any worsening of the economic conditions in the Eurozone will increase contagion risk for Asia Pacific, given the region's--particularly the open economies'--sensitivity to capital flows and trade."

 

S&P has lowered the base case forecasts of 2012 real GDP growth by about half a percentage point for some countries, with China's revised to 7.5% (from 8%); Japan to 2% (from 2.5%); Korea to 2.5% (from 3%); Singapore to 2.1% (from 2.5%); and Taiwan to 1.9% (from 2.5%).

 

Earlier this month, Morgan Stanley had also lowered India's growth forecast to 5.1% for the current fiscal from its earlier estimate of 5.8%; HSBC - 5.7% from 6.2% and Standard Chartered to 5.4% from 6.2% projected earlier.

 

The growth rate in the first quarter (April-June), according to the data released by the government, has slipped to 5.5%, from 8% in the same period last fiscal.

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COMMENTS

M G WARRIER

5 years ago

India should think in terms of setting up a rating agency of international standard which will understand India and advise stakeholders about the health of domestic financial institutions and the financial institutions and governments abroad with which India has dealings. Agencies like Standard and Poor and Moody’s are doing their work within their limitation and even they would be benefited if an internationally acceptable rating agency comes into being in India.

Economy & Nation Exclusive
Rapid reforms in government policy not good for economy, says BNP Paribas

Political turmoil is not the only consequence of rapid reforms in government policy. It is not good for the economy or for corporate earnings, says the BNP Paribas equities research report

The UPA (United Progressive Alliance) has lost a key ally in the coalition, the TMC (Trinamool Congress), as an immediate consequence of rapid reforms in government policy last week. But BNP Paribas equities research in its report warns that there is more trouble to face for the country, the economy and the corporate sector in the light of the hasty approach of the government.

 

  • Big bang measures: good for sentiment but not immediately relevant for earnings or the economy

The government’s recently-announced reform measures—increase in diesel price, FDI in multi-brand retail, etc—reduce the “tail risks” to the Indian market. Apart from a 0.15% decline in fiscal deficit of GDP (gross domestic product) for FY13 and some upward pressure on the rupee, BNP Paribas sees limited near-term impact of the government measures.

 

  • Further “nuts and bolts” measures are required

According to BNP Paribas, the need of the hour is to kick-start the investment cycle. Many projects in the electricity, metals and chemicals (refinery) sectors are stalled because of issues related to environment clearance, land acquisition or fuel supply. The proposed National Investment Board, headed by the prime minister, to fast-track projects above a certain threshold (tentatively Rs10 billion), could help speed project execution.

 

  • Some short-term weakness possible in certain stocks

While the recent measures are sentiment positive, BNP Paribas believes that their impact on corporate fundamentals will be limited. The recent rally of some stocks was driven both by “risk on” sentiment post easing by G3 central banks and positive sentiment after the flurry of reform announcements. The rally is overdone and provides some profit booking opportunities. BNP Paribas analysts highlight the rallies in JSPL (Jindal Steel Power), RIL (Reliance Industries), DLF, SBI (State Bank of India) and BHEL might lead to short term weakness. Two-wheeler stocks, particularly Hero MotoCorp, are also suffering from low retail demand and high inventory, which the market seems to have overlooked.

 

  • BNP Paribas sticks to its year-end Sensex target of 18,500

India has been one of the best performing markets over the past few weeks – outperforming regional peers and the benchmark MSCI AxJ and EM indices. After the recent run-up, the Sensex 12-month forward P/E (price-earnings) valuation is at 14.1 times—just 7% below its long-term average of 15.2 times. This will be a near-term ceiling given ongoing deleveraging pressures. As such, BNP Paribas retains its year-end Sensex target of 18,500, derived using justified P/BV (price-to-book value ratio). At the BNP Paribas target, the Sensex would trade at a 1-year forward P/BV of 2.2 times and PE of 13.7 times.

 

BNP Paribas sums it up as “We are not worried about government stability as a consequence of this development. The numbers are simply too overwhelmingly in favour of the ruling coalition.” Still the advice to the government would be “slow and steady wins the race” even in reforms in government policy.

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COMMENTS

MOHAN

5 years ago

Rapid fire Reforms? !!

Policy Paralysis to Policy Delirium !!

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