Sunday, November 22, 2009

A Check on Indian & Global Recovery

India's industrial output jumped by a higher-than-forecast 9.1% in September from a year earlier with 9.3% growth in manufacturing output. Production of consumer durables, that was particularly hard hit as India suffered the fallout from the international slump, grew by 22.2 percent in September underpinned by robust consumer spending fuelling hopes that Asia's third-largest economy is firmly on the up-trend. Emerging market leader China recorded industrial production expansion of 16.1 percent in October. US industrial production figures for October showed a mixed picture; manufacturing output eased after several strong months as auto production fell 2.0 percent, reflecting some of the volatility from the end of a government incentive program. With the U.S. unemployment rate at 10.2 percent, U.S administration faces a delicate balance of trying to boost the economy and spur job creation while putting the economy on a path toward long-term deficit reduction. In fact, the US president has again reiterated the need to contain rising U.S. deficits, saying that if government debt were to pile up too much, it could lead to a double-dip recession — two issues we have written about in two previous posts to this blog.

India’s Merchandise shipments dropped 11.4 percent from a year earlier to $12.5 billion after sliding 13.8 percent in September. September's figures for several Asian economies including China showed weakness in outbound shipments. In India the continued decline in heavy-weight sectors like engineering goods or readymade garments is a cause for concern, as much of the boost has come from high value sectors like pharma and electronics and also from a diversification to new markets. The improvements in recent months, compared with earlier slides like a 33-39% drop between March-May this year, suggests that the global demand slump may finally be easing. Indeed, U.S. imports rose by $9.3 billion in September to $168.4 billion; the 5.8% increase from August was the largest one-month percentage gain in 16 years and is a sign of improvement in US domestic demand. In UK too, overall imports rose by 7.5%, due to an increase in auto exports of 29.2% over the month. In the Euro zone, Germany’s economic recovery accelerated in the third quarter as government stimulus programs fueled company spending and a rebound in global trade boosted exports, helping the 16-nation euro area return to growth in the third quarter. German imports also rose strongly in the quarter. The Euro zone's main consumption-driven economy, France, is growing but at a slower-than-expected pace. Japan’s Q3 growth at 1.2% is almost double that of market expectations, however, deflation is back to haunt the economy as the domestic demand deflator fell by 2.6% recording its steepest fall in over half a century not boding well for global economic recovery.


FII flows of Rs 73,440 crore so far this year in India’s bourses is the highest ever investment made in rupee terms in a single year. Measured at about $15 billion, flows are likely to exceed record levels of close to $17.65 billion seen in 2007. This is perpetuated by the fact that FIIs are able to borrow money at near zero per cent interest rates in the developed markets and park such capital into Indian equities made attractive by the country’s growth potential. Such heavy inflows has become a concern for policy makers and exporters alike and a Brazil style tax on short-term cross border flows has been suggested to discourage USD carry trades. However, the Finance Ministry is not considering any immediate curbs on foreign portfolio flows, probably as the stock market recovery is nascent and domestic investors may not have enough drive to keep the bullish sentiments going in the secondary capital market. (More on this issue in our next post.)

India's annual food inflation, which has been the key inflation driver, jumped to 13.68 percent in the last week of October and further to 14.55% in the first week of November; as we have detailed in the previous post to the blog, the central bank has already turned somewhat hawkish to control inflationary pressures which are mounting (Click here to see summary of latest RBI policy). The government may set out the time frame for the withdrawal of stimulus measures in the Union Budget presented before the next fiscal, if global recovery remains on track. The interest rate tightening cycle could begin if the WPI based inflation rate, which was at 1.3% for October, crosses 5%.

As countries around the world recover from the crisis, unanswered questions about the necessary restructuring of the global economy require urgent attention, according to leaders from business, academia and society. Speakers at the World Economic Forum's Summit on the Global Agenda expressed the view that the crisis has focused the minds of governments, particularly the G20, on what you need to do to rebalance globalization; it means rebuilding economies, balancing exports with domestic demand and investing in jobs and social protection. Some also opined that, while global efforts to address the crisis have stopped the downward spiral of the broad economy and sparked renewed confidence in the financial markets, there are acute worries that the momentum for reform might be ebbing.

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