April Index of Industrial Production data has come out at 7% versus 11.3% YoY. March IIP numbers have been revised to 3.9% vs 3% earlier. CNBC-TV18 poll predicted the IIP number at 6.4%. The April manufacturing growth came at 7.5% vs 12.4% YoY.
After IIP growth numbers were released, experts were positive on the numbers but don't see growth moving up. Shubhada Rao of Yes Bank is not optimistic about the continuation of growth. On the other hand, David Carr, Standard Chartered Bank feels that the government is focusing more on inflation control rather than growth.
Although Rao is slightly optimistic on the IIP front. She said, “We were at about 6.5% on the forecast ourselves, so anything above that is clearly a pleasant surprise.” She sees FY09 GDP growth at 7.5-8%.
Expectations were getting anchored aggressively because of the repo rate hike. It also gave a clue that perhaps growth wasn’t all too bad that was being broadly expected. She said, “Our 8% forecast although may look for a somewhat downward revision, but the initial cues are fairly encouraging if you look at not just IIP but overall services growth. Rail freight has been growing at 21% as well as transport and communication. So all said done, auto sales are good in May they have been even better than April, so as of now there is no visible evidence that the growth momentum is on a complete slowdown."
On GDP numbers, Soumendra K Dash of CARE feels that 8% is fairly possible because though RBI has taken a lot of a monetary stance which has really curtailed that money supply growth. The rate of interest is increasing and money is becoming expensive, GDP will touch 8% and if not then 9.5%, he added.
HDFC Bank does not rule out CRR hike if July liquidity goes up. The view is that there is no crisis in growth and RBI is giving priority to inflation.
ICICI Securities view on this is that the momentum in economy is stronger than anticipated. Further move by RBI before July-end is unlikely. On the other hand, BNP Paribas sees 25 bps CRR hike before RBI july policy.
Naval Bir Kumar, MD of IDFC Asset Management said, “It is definitely better than the 3.9% revised number for March. But having said that, it is still significantly lower than last April's growth numbers. Somewhere towards 2003-end, we saw an increasing trend of growth and over the last eight months, we are visibly seeing a slowing trend of growth.”
According to Bir Kumar, inflation has been a concern in India for the last few months, but the indication from RBI so far was that they are trying to balance growth with inflation. Hence, RBI targeted liquidity management rather than tampering with interest rates in the economy. The increasing interest rates seem to indicate that they are now biased more towards inflation and that’s become a worry for them, rather than trying to also manage growth at the same time, he added.
This has been a trend, for not only India, but one will see a rate hike every time one sees high inflation and rising interest rate environments. Fed has also indicated that the next move may be up. Bir Kumar does expect GDP growth numbers to be under stress with higher interest rates.
Bir Kumar explains that the government has said that nearly two-thirds of infrastructure spending will be done by the public sector. Therefore, in a deteriorating fiscal situation for the Government of India, which seems to be very visible in 2009, same level of infrastructure spending will not be there. This increases the cost to the economy and reduces demand in the economy because investment spending comes down. Therefore, according to him, these are all domino effects that will happen. He said an analysis of the data over the next few months will be done.
Looking forward...
Dash of CARE senses smugness in the envelope of the corporate world. He feels that IIP may grow at 7% probably because of the lower base year effect. If you see that in April and March 2007, there is a drastic fall in the index by slightly above 15% but the momentum may not continue in future, he added.
Rao believes that the overall macro-economic environment is not exactly conducive to be extremely optimistic that this growth momentum will continue going forward. We do see dips and impacts of a repo rate hike and the money supply still at 22.5%. She said, “We can’t say that we are done with monetary tightening; we still possibly have some more in store for us. It all boils down towards oil and the way we take our inflationary expectations. We are yet to see a full blow out of the second order impact of current inflationary pressures. The RBI has pre-empted on that point of view also. So, growth possibly can get moderated going a little bit ahead.”
Spiga
IIP @ 7%: Has RBI dumped growth to contain inflation?
How is inflation calculated?
"Inflation is taxation without legislation." Milton Friedman.
India uses the Wholesale Price Index to calculate and then decide the inflation rate in the economy. Most developed countries use the Consumer Price Index to calculate inflation. WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market.
In India, data on a total of 435 commodities' prices is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.
CPI is a measure of a weighted average of prices of a specified set of goods and services purchased by consumers. It is a price index that tracks the prices of a specified basket of consumer goods and services, providing a measure of inflation.CPI is a fixed quantity price index and considered by some a cost of living index.
Many economists say that India must adopt CPI to calculate inflation as CPI measures the increase in price that a consumer will ultimately have to pay for. United States, the United Kingdom, Japan, France, Canada, Singapore and China use CPI to measure inflation.
WPI does not measure the exact price rise consumers will experience because, it is calculated at the wholesale level.
Another issue with WPI is that more than 100 out of the 435 commodities included in the Index are no longer important for consumers. Even commodities like livestock feed are considered to measure the WPI. In India, inflation is calculated on a weekly basis.
World inflation - Is the worst over?
The world is alive with the sound of inflation. Policy makers are troubled and central banks have retreated somewhat from their lofty one-shoe-fits-all (read inflation targeting) policy they were trumpeting not so long ago. There are no easy solutions in sight, just speculation about policy response. We are all running helter-skelter to answer the big question - not the sub-prime crisis, or banks going bust, or even whether the US is, or will be, in a recession. Quite simply, the need is for an assessment of the future course of inflation. An examination of the past may be the first pointer. The graph shows averages of country-level inflation since 1960 with countries bunched according to their rank in each individual year. For example, Brazil was a member of the hyper-inflation club in 1990 (rank of 99) and an above-average performer in 2007 (rank of 38). The results are striking - the pattern of inflation change was not a function of inflation targeting, or even whether a country had a central bank or not! Low inflation in the 1960s, peak inflation in the mid 1970s and early 1980s (the oil and wheat shock of 1972/73 and the oil shock of 1979); and a large structural decline since 1980 with a trough in the early 2000s. Last few years, practically all countries show an acceleration in inflation. Inflation targeting or reducing/anchoring inflationary expectations did not play much role in reducing inflation; if not, what did? Most likely, the prime cause has been the important role of productivity growth in developing countries, especially the large-sized countries like China and India. With Africa and Latin America now joining the development party, subdued world inflation is more likely than not. It might be news to George Bush, but this productivity and income growth did lead to more demand for food and commodities and oil in the developing countries over the last not one, not five but last 20 years. During the same period, however, commodity prices generally declined, or worst case, stayed constant in real terms. But what happened to the forecast of low inflation in 2008? World inflation is broadly composed of three commodities: energy, agriculture and metals (both precious and other metals). The long-term pattern of commodity inflation is as follows. A trough in 1997/98 (Asian crisis), and then a rise such that by late 2007, real commodity prices were on their highs but still considerably below the peak reached in the 1980s. Simultaneously, world per capita growth exceeded 3.5 per cent per annum (purchasing power parity data) during these years - a level not seen since the 1960s. So the pattern, until 2008, has been of high economic growth, high increase in commodity prices and low individual country inflation! So what did happen? A reasonable speculation is that this recent burst in prices has more to do with old-fashioned speculation than even older-fashioned fundamentals. In this regard, the recent hysteria pertaining to the Indian rupee is relevant. Then (was it just a month ago?) the slogan was: India is a fast-growing country, currencies of such appreciate, and therefore the rupee should go to 38/US$ by June 2008. Today, the rupee is at 42.8/US$. The same explanation (story) is forwarded for commodities; India and China are growing, so demand will grow etc. etc. Just like gravity had to catch up with the rupee (notwithstanding the well grounded in fundamentals forecast of all the major investment banks, domestic and international), so is gravity likely to catch up with commodity price inflation. Trends in world inflation will likely dictate domestic inflation. Except for oil, the major commodities of the world are already in a downward slide. The attached table tells the story. First, agricultural commodities (the source of the political problem with inflation) have already declined (from their peaks made just weeks ago) by significant amounts. As of May 16, wheat prices are off 39 per cent; soybean prices (for edible oils) are off 13 per cent. Even rice prices, after catapulting just a few days ago, are off 16 per cent. On average, food prices are off 15 per cent from their highs. The same magnitude of decline is witnessed in the metals space, precious or otherwise. But what about the price of oil? The oil complex remains at its highs; after making a new high just a few days ago, the oil complex is off 2 to 4 per cent, i.e. no decline. The present oil price is some 20 per cent higher than its highest real price, ever. If one adds the value of the dollar (up 3 to 10 per cent from the lows against major currencies) then oil remains the only glaring exception in the commodity space. In this regard, it is pertinent to note that the Dow Jones Transportation average is up 17 per cent for the year - just slightly less than the increase in the price of oil! If other commodities are any guide, then the identity of which market is smoking what will soon be known. When international commodity prices come down, domestic inflation will also come down. There is very little demand pull left in India; the monetary authorities have achieved their objective (right or wrong) of considerably slowing down the economy. Wage growth, an indicator of demand pull inflation, is barely keeping pace with inflation; bank credit growth has also slowed down drastically; and real interest rates are among the highest in the world. And until very recently, our exchange rate had also appreciated close to the maximum in the developing world. None of this was successful in insulating India from importing world inflation; indeed, our acceleration of inflation, while lower than China, has been on the high side in the developing world. So India has lost out both in terms of lower economic growth and higher inflation. What is the appropriate policy response to this inflation? Patience. Inflation will likely decline, and by fall 2008, the world (and domestic) inflation could be stable, and lower. Growth should also be accelerating at that time. Better for Indian policymakers to step back from the brink, say that they are doing everything that is advisable and possible, and let prices unfold. And plan for elections in the winter! SOURCE: Rediff.com
Inflation at 7.57%; likely to go up to 8%: Experts
Data released by the government on Friday showed the wholesale price index rose 7.57 percent in the 12 months to April 19, above the previous week's 7.33 percent and outstripping market expectations of an annual rise of 7.38 percent.
The government and central bank have rolled out a string of policy changes in recent weeks as inflation has soared.
In the latest move, the Reserve Bank of India on Tuesday raised the cash reserve ratio (CRR) by 25 basis points to 8.25 percent, its highest level in seven years, and said it was ready to act again if price pressures continued to build.
Wholesale inflation now stands at its highest since November 13, 2004, when it was 7.68 percent. The latest rise was largely driven by higher prices of foods, metal products, and industrial fuels.
Economists expect the central bank to focus on draining inflation-fuelling cash from the system, while the government moves to fix supply-side problems.
"Across the board price pressures are there. We are yet to see the impact of monetary and fiscal measures," said Shubhada Rao, chief economist at Yes Bank in Mumbai. "These pressures would continue. The RBI will continue to focus on liquidity management as a monetary policy approach."
Speaking to reporters in the southern city of Bangalore, Finance Minister Palaniappan Chidambaram said inflation would be contained but people would have to be patient.
The markets remained cool to the data with the yield on the 10-year federal bond steady at 7.89 percent, while the rupee was at 40.64/65 per dollar, slightly weaker than 40.63/64 beforehand.
The Congress Party-led coalition, under pressure from its allies, also unveiled new measures on Tuesday to tame inflation and guard food supplies, slapping export taxes on basmati rice and some steel products. Policy planners the world over are grappling with soaring food and raw material prices.
But India, which has about 260 million poor, is especially sensitive to rising prices as food accounts for a much higher proportion of people's expenditure than in developed economies.
Fighting inflation has become a top priority for the government as it heads towards a general election due by May 2009 and a series of key state polls this year.
COMMENTARY
Shubhada Rao, Chief Economist, Yes Bank, Mumbai: "Across the board, price pressures are there. We are yet to see the impact of monetary and fiscal measures. Year ahead, these pressures would continue and 5.5 percent will be a challenge. The RBI will continue to focus on liquidity management as a monetary policy approach."
Economictimes.com