Tag Archives: Indian Economy

Inflationary challenge not yet over; RBI can cut rates in FY17

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It is difficult to cut rates when RBI is conscious of inflationary challenges.

Rupee, Indian Economy, India Rating, Union Budget, Fiscal Policy, Track2Media ResearchIndia Ratings and Research (Ind-Ra) expects average wholesale price index (WPI) to rise by 2.7% and Consumer price index (CPI) to rise by an average of 4.9% in FY17. Notwithstanding the benign retail and wholesale price forecast for FY17, Ind-Ra believes the inflationary challenge is far from over as food prices have more than often triggered surprises.

Ind-Ra’s Report ‘Economy to Expand, But Fiscal Slippage Likely in FY 17′ ‘published on 18 January projects benign retail and wholesale price forecast for FY17.

India is not alone and Emerging markets are also likely to see retail prices rise close to 6% in 2016 and 2017 as per the International Monetary Fund (IMF) projection that consumer prices in emerging markets will rise by 5.6% in 2016 and 5.9% in 2017.

This is also broadly in line with the Ind-Ra view on retail inflation in India which is likely to rise by an average of 4.9% in FY17. The IMF’s projection of a decline in commodity prices – oil prices by 17.6% & non fuel prices by 9.5% in 2016 is likely to keep the fuel and power component of wholesale prices in India down even in FY17.

Ind-Ra thus expects the average WPI to rise by 2.7% in FY17. Despite the expectation that prices remain under control in FY17, Ind-Ra believes the inflationary challenge is far from over as food prices have often in the past triggered surprises. The food related headwinds have been a mixture of structural and cyclical factors.

The structural issues plaguing Indian agriculture lately are i) stagnation in productivity, ii) rising cost of cultivation, iii) changing food consumption pattern, and iv) exploitation of supply shocks by intermediaries.

The government has made several attempts in the FY15 and FY16 union budget to address some of the structural/supply-side issues facing agriculture. An ambitious ‘Soil Health Card Scheme’ has been launched to improve soil fertility on a sustainable basis.

An agri-tech infrastructure fund, a technology driven protein revolution in the country, a price stabilisation fund, and Prime Minister’s irrigation scheme with a special focus on micro-irrigation and watershed development are at various stages of implementation.

An allocation of INR250bn has been made to the Rural Infrastructure Development Fund set up in National Bank for Agriculture and Rural Development (‘IND AAA’/Stable) to augment rural infrastructure. Also the target for the fund for FY16 has been increased to INR8,500bn, to improve the amount of agricultural credit to farmers.

Similarly, INR50bn has been allocated to upgrade/create warehouse infrastructure to strengthen the agricultural supply chain. A national market for agricultural commodities is also in the offing by overhauling the Agricultural Produce Marketing Committee Act in consultation with the state governments.

Ind-Ra believes these are important measures and if implemented appropriately will have a positive impact over the medium- to long-run. In the interim, however, the government will have to keep food inflation under check by keeping a close eye on agricultural output and its prices through market intelligence and intervention.

The government has succeeded in keeping in check the prices of cereals so far this fiscal due to the i) efficient food management, through the timely release of food stocks, ii) limited increase in agricultural support prices and iii) lower international food prices discouraging exports. The two food items that have spoiled the party lately are onion and pulses.

Although the WPI based price is still showing deflation, it has been declining since August 2015. It is likely to turn into inflation during 4QFY16 due to the rapidly inching up of prices of food and non-food articles.

Also, the progress of rabi sowing is not encouraging after the adverse impact of monsoons on the kharif output. As on 23rd December 2015, the total area sown under rabi crops stood at 52m hectares, lower than the same period in 2014. Ind-Ra therefore believes that seasonal/cyclical headwinds in combination with structural issues remain a threat for food prices even in the foreseeable future.

Similar to WPI inflation, the key driver of the Consumer price index (CPI), RBI’s nominal anchor, is food inflation. Having nearly 46% weight in CPI, food and beverage inflation jumped to 6.3% in December 2015 from 2.9% in August 2015.

However, Ind-Ra expects the CPI inflation to decline to around 5.8% in January 2016, RBI’s revised target. Although by calling the 50bp repo rate cut, in its fourth bi-monthly review on 29 September 2015, a frontloaded policy action, RBI has nearly shut the door on further rate cuts in FY16, RBI’s policy stance is likely to be accommodative in the near term. If conditions permit, Ind-Ra expects a 25-50bp cut in the repo rate during FY17.

By: Dr Devendra Pant, Chief Economist, India Ratings & Research

Who is pocketing the falling crude oil benefits? It is government!

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Petrol, Crude Oil, Petrol Prices, Crude Oil Prices, Track2Media Research, Indian Government, Indian Economy At a time when the global crude prices are falling and has touched the historic low, it is pertinent to ask who is benefitting out of this profit. It is definitely not the common man who has been given the benefits of low crude prices. It is government! Yes, you heard it right. It is the Modi Government that is eating into the profits of falling crude prices.

The fall in global crude prices means oil in India now costs less than a bottle of mineral water. However, the drop in domestic petrol and diesel prices has not kept pace with global prices because the government has repeatedly hiked excise duty on petrol and diesel to increase its revenues.

Earlier this month, excise duty on petrol and diesel was hiked for the third time in the current fiscal year.

The government last week said that the price of Indian crude basket has fallen to $29.24 per barrel or Rs 1,956.45 per barrel at Rs 66.91 per dollar as on January 7, 2016. An oil barrel is 159 litres, so the price of one litre of crude oil comes to Rs 12 per litre, which is 20 per cent lower than a litre of mineral water priced at Rs 15.

Oil prices have already fallen over 70 per cent since the downturn began in mid-2014. Goldman Sachs predicts oil could hit $20 a barrel.

The crash in global crude prices has however moderately benefitted Indian consumers as pump prices have fallen by just 20 per cent as compared to the 70 per cent drop in global prices.

Basic excise duty on petrol has gone up by Rs 7.73 per litre in fiscal year 2015-16 while on diesel it has risen to Rs 7.83 per litre. The government had in four instalments raised excise duty on petrol and diesel between November 2014 and January 2015 to lessen the reduction in retail rates, which followed falling international oil rates.

If the government would not have raised these duties, consumer price of petrol and diesel should have been lower by Rs 10.02 a litre and Rs 9.97 per litre, respectively.

Petrol currently costs Rs 59.35 per litre in Delhi while diesel is priced at Rs 45 a litre.

Isn’t it ironic that those who ridiculed the former Prime Minister Manmohan Singh who was managing the economy at the historic high crude prices of $147 are now eating into the benefits of falling crude prices? Well, the common man is definitely wondering who is “Anarth Shastri” of India.

How PM Modi made a mess of the economy in 20 months

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Indian Economy, Inflation, Financial mess of economy, GDP Growth, Monetary Policy, Fiscal Policy, Track2Media ResearchWhen Narendra Narendra Modi came to power, many of his corporate friends were ecstatic, because they thought the government would move away from the social welfare policies of the UPA. Their belief was strengthened in the 2015 Union Budget which saw Corporate Tax being reduced from 30% to 25%.

Today, the Congress party is silently smiling even though in these last 20 months, the Modi Government has systematically weakened UPA’s social sector schemes that were meant to help the poorest in India. As rural demand fell, it laid the foundation of the economic mess we are in.

However, the agitation by the Patidars – one of Gujarat’s prominent business communities, exposed the hollowness of the macro-economic data coming from Gujarat in the last 15 years. The growth had, clearly, not been transferred to the common man.  The Indian stock market, which was jubilant when Modi came to power, is now on a downward trend.

Worryingly, new projects worth only Rs. 1 lakh crore were announced in the December 2015 quarter, down from Rs. 4 lakh crore in December 2014.  This is the lowest in the past 5 quarters. On a year-on-year basis, this was lower by 74%. The value of abandoned projects also increased by 19% in 2015 compared to the same period in 2014. The transport infrastructure and storage sector accounted for 60% of these abandoned projects.

Project investments and proposals are the best gauge to understand economic activity of a nation. As the Mid-year economic review has shown, much of the credit to industry may have been to stressed sectors, leading many experts to believe that loans were provided for balance sheet purposes rather than to finance new activity.

Growth in capital-goods imports has fallen from 12% to nearly zero and our exports have been on a downward slide for the last 12 months, and have reached a situation not seen in over 40 years.


Modi’s opponents playing on his turf

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Nrendra Modi, BJP, RSS, NDA Government, Indian Economy, Track2Media ResearchThe very basic of politics, or life for that matter, says one should force the opponent to play on a neutral turf, if not on his own turf. The ruling BJP in general and the Prime Minister Narendra Modi in particular is fortunate to have not only got a massive mandate but an ideologically challenged and confused opposition.

It is no secret that the brand of politics that has mentored Modi thrives on the issues of pseudo nationalism and communal polarization. And yet, a confused opposition is wasting its energy to nail him on the very same plank. This continues to polarize the right wing support base of BJP.

To ridicule BJP for its lack of right wing intellectual clout in the governance and national policy may be having merit in absolute terms but in relative term it helps than harms the Modi Government. Blame it on the same poor intellectual orientation of Modi’s voters but that is a reality. You condemn Modi for communal polarization, intolerance or being intellectually challenged, it adds to his charisma as he is addressing a very different kind of voters.

Modi cannot be nailed beyond a point even on foreign policy issues for being directionless. The lack of diplomacy is being compensated with the unprecedented event management of the government. When Modi says “Pehli Baar” (First Time) he is referring more to the kind of glamour that he has added to his foreign trips than anything substantive. The cheerleaders only know when to clap; for what to clap is beyond their level of understanding.

Add to it, the support base of the NRIs whose business interests in the country always translates as diplomatic success for a Prime Minister who is a master craftsman of creating a mass hysteria. Modi can never be nailed with criticism for being symbolic than substantive.

What then is his weak link? What is that one single issue on which this entire government looks to be on the back foot? It is the economy. Sadly, no one in the opposition seems to realize this. Nail it there and they have no answers to offer.

Historically it has been an ideological dilemma of the BJP’s mentor RSS as to what extent Swadeshi should be practiced and how far modern realities need to be embraced. This time the confusion is even more on issues ranging from economic mismanagement to over-promise that brought this government to office.

A government that adds the 2.2 percentage of deflation to the 5.2 percentage of GDP growth to glorify it as 7.4% growth definitely has very poor economics in the backroom. This is where his support base also goes into silence as the sliding Indian economy with nose-diving job market is something that hurts everyone, including die-hard Modi bhakts.

Modi called former Prime Minister Manmohan Singh “Anarth Shastri” over rise in petrol prices. The then UPA II Government was selling it at the rate of Rs. 70 plus when the international crude prices were at its historic peak level of $140 plus.

Today, at its historic lows when the international crude prices are hovering around $32-36, all that the Modi Government is doing is to keep the excise duty increasing. What for? This is something that the opposition needs to ask and make it known to the public at large.

The opposition that continues to play on the traditional strength of Modi has asked not many questions on the economic nonsense. The think tank within the BJP, if any they have, must be smiling.