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Monday, June 26,2006

India Intelligence Report

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   CII Predicts Slower GDP Growth

 
Hot Topics
   
 Inflation Item  Inflation Rate
Overall  Wholesale Price Index (WPI)  5.24%
fuel, light, power and lubricants  9.9%
Manufactured Products  2.9%
Food Articles  8%
Cereals and pulses  9.5%
Eggs, meat, fish  8.9%

 

  • CII says it expects growth at 8% down from 8.4%

  • Inflation, rising fuel process seen as main culprits

  • Inflation caused by many factors including supply shortage

The Confederation of Indian Industry (CII) predicted slower Gross Domestic Product (GDP) growth in the current year bucking last year’s 8.4% growth propped up by 3.9% growth in Agriculture but insisted that growth will remain impressive at the 8% level.

In its State of Indian Economy (SOE), CII cited hardening of interest rates, rising fuel prices, and inflation to lower its expectation of GDP growth. However, the 8% prediction assumes normal monsoon and a replay of Agricultural performance combined with global growth.

CII said that while it is satisfied with the improving manufacturing and electricity sector growth at 8.9% and 6.1% respectively in the 4th quarter (Q4) of 2005-2006, it voiced concern over Industrials and Service sectors clocking a year-on-year decline in the growth to 8.2% and 10.9% and the general slowdown of mining to 3%. The Index of Industrial Production (IIP) growth also fell marginally from 8.4% to 8.2%.

Inflation is a major problem in India now. As seen from accompanying table, cost of food grain has grown up by as much as fuel. However, some specific items such as Urad Dal went up by 65.9%, Moong Dal by 47.7%, and spices and condiments by 22%. With Consumer Price Index (CPI) growing  at 6.41%, the Government has allowed the import of wheat and sugar at 0% duty thinking  that increased supply will lower the prices.

However, the Government is also expecting the inflation numbers to fall primarily because last inflation figure which caused a jump in numbers to the WPI happened June/mid-July last year. So, while inflation numbers may be reported lower in summer, the real test will be the CPI.

Real fears of inflation is also raising fears of a rate increase by the Reserve Bank of India (RBI) leading to speculatively high yield curves where the 10-year treasury is above 8%. Economists feel that the inflation is more supply side issues than real inflation caused by fuel prices increases. There is very little that the RBI can do to arrest such inflation and the more rates it hikes the worse off the economy will get. The RBI has already employed tools it has within its control such as controlling money supply (M3) to be lower than the previous year, buying dollars, etc. However, latest data show that credit growth is picking up which means that the RBI will need to tighten money supply again. Most importantly, in a global economy, the RBI has to respond to what other Central Banks do. Since most of them are increasing interest rates, economists expect the RBI to follow suit.


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