Monsoon Worries, Consumption Slowdown Plague Indian Economy

The highlight of the last fortnight was RBI’s credit policy and Quarterly Economic Review. The RBI took a neutral stance and kept all the key rates unchanged given the state of economy. GDP growth is pegged at 6% with an upward bias. Inflation remains a worry for RBI and forecasted WPI for the fiscal year was revised upward from 4% to 5%.The Indian economy is precariously poised, walking a thin line. The government has been providing stimulus and has raised its expenditure to fill in the voids created by Private expenditure. In fact, the contribution of government final consumption expenditure to GDP growth expanded four-fold from 8.0 % in 2007-08 to 32.5 % in 2008-09, while the share of private final consumption expenditure nearly halved from 53.8 % to 27.0 % during the same period.Given India’s high fiscal deficit, the trend is unlikely to continue and we may face severe issues if the economy fails to pick up with current stimulus.Table: Demand Components of GDP: 2008-09 Q1Q2Q3Q4Full yearYear-on-Year Growth Rate (%)Private Final Consumption Expenditure4.52.12.32.72.9Government Final Consumption Expenditure-0.22.256.621.520.2Gross Fixed Capital Formation9.212.55.16.48.2Net Exports-75.9-62.1-75.4-30.8-41.2Share in GDP (%)Private Final Consumption Expenditure58.055.557.451.455.5Government Final Consumption Expenditure9.68.312.513.411.1Gross Fixed Capital Formation32.234.530.931.632.2Net Exports-1.3-10.5-8.5-2.9-5.8 Table: Contribution of Demand Components to GDP GrowthShare in GDP Growth (%)2007-082008-09Private Final Consumption Expenditure53.827.0Government Final Consumption Expenditure8.032.5Gross Fixed Capital Formation43.642.5Net Exports-14.0-29.5
Though the RBI and the Government have taken a number of steps, the credit flow and the monsoon picture is pretty worrisome. In the absence of adequate demand for credit from the private sector, commercial banks stepped up their lending to the Government which increased by 48%. The increase in net commercial bank credit to the Government reflected the accommodation of enhanced market borrowing program of the Government during 2009-10. Expansion in non-food credit to the commercial sector witnessed a sharp deceleration and remained below the Reserve Bank’s projected trajectory of 20.0 per cent growth for the year 2009-10.However, the year-on-year (y-o-y) rate of growth in bank credit edged up for the first time this fiscal as per data released by RBI on 3 July. The y-o-y growth in bank credit was 16.3%. Between 10 April and 8 May, bank credit contracted by RS 19385 crore, while it went up by RS 15292 crore during the same period last year. Between 8 May and 5 June, bank credit increased by a mere RS 5154 crore, while it went up by RS 35243 crore last year during the same period. But between 5 June and 3 July, the increase in credit of RS 41537 crore was much more than the rise in credit of RS 22255 over the corresponding period of last year. If sustained, this could mark the beginning of higher credit off-take.An up-tick in the credit growth is seen as a lead indicator for acceleration in investments by companies fueling growth.The IIP data has shown signs of stabilization in recent months. Consumer Durables and Intermediate goods have shown positive traction. Rural demand and increased purchasing power due to revised pay commission have been propping the indices up.Growth in IIPMonthMiningManufacturingElectricityGeneral (104.73)(793.58)(101.69)(1000.00) 08-0909-1008-0909-1008-0909-1008-0909-10Apr171.1177.7285.0286.2218.2233.6266.3269.5May*177.4184.0293.1300.5230.1237.6274.6281.9 Average Apr-May174.3180.9289.1293.4224.2235.6270.5275.7 Growth over the corresponding period of previous year May5.53.74.52.52.03.34.42.7Apr-May5.83.85.61.51.75.15.31.9 Growth in IIP: USE-BASED 2008 – 20092009 - 2010MayApril - MayMayApril - MayBasic goods33.53.84.2Capital goods4.38-3.6-5.3Intermediate goods1.92.56.16.7Consumer goods7.481.2-1.2Consumer durables2.8312.414.7Consumer non-durables99.5-2.3-5.8The Index of Six core industries have a combined weight of 26.7 per cent in the Index of Industrial Production (IIP), which stood at 251.6 (provisional) in June 2009 and registered a growth of 6.5% (provisional) compared to a growth of 5.1% in June 2008. During April-June 2009-10, six core industries registered a growth of 4.8% (provisional) as against 3.5% during the corresponding period of the previous year. Sectors like cement, steel, electricity have shown signs of stabilization and strength in the preceding quarter.Capital goods though seem to be an area of concern. Tight liquidity conditions and a drop in investment activity seem to be taking its toll on the industry. L&T, India’s premier conglomerate in its latest quarterly results reported a drop of 22 % in order inflow.Agriculture and allied activities fuel Indian rural demand that everyone is banking on. Agriculture contributes only 17.5 % to the GDP, but its performance is critical as it employs over 55 % of the total work force. A good monsoon is essential not only for reigning in food prices, which are hitting higher highs each passing day, but also for healthy rural demand.Unfortunately, Indian farmers are dependant on monsoon for irrigation. More than 73% of annual rainfall in the country is received during the monsoon season. Annual average rainfall is 1160 mm in India out of which 85% is concentrated in 100-120 days of southwest monsoon.

The cumulative rainfall during the season so far (up to July 22, 2009) has been less than satisfactory, with rainfall over the entire country being 19.0 % below normal as against 2.0 % below normal during the corresponding period of the previous year. Of the 36 meteorological subdivisions, cumulative rainfall was excess/ normal in 17 sub-divisions (21 sub-divisions last year). The north-west region faces a deficiency of 44%.As on July 23, 2009, the total live water storage in the 81 major reservoirs of the country was 23.0 % of the Full Reservoir Level (29.0 % during the corresponding period last year). The figure is less than 50% of the last 10 years’ average level.This has serious implications for India’s food output. As per the latest reports from the ministry or agriculture, the area planted so far under Kharif crops has fallen by 25% as compared to last year. The area sown under food grains has fallen by 28% as compared to last year. Area under cereals has decreased by 29% and pulses by 19%. Even the area under non-food grains like oilseeds also has declined by 35%.Crop output, which is a product of area and yield, is severely affected only if there is a deficiency of rainfall in 3 consecutive quarters –March-May, June-September and October-December. Coming to the current kharif season, the pre- monsoon (March-May) rainfall was deficient by about 32% and the monsoon rainfall so far has been below LPA by 24 %.India has been witnessing an improving state of affairs in domestic production and consumption, but the fiscal situation of the country is pretty grim. With current monsoon worries, India could face prolonged slow-down as consumption slows down due to lag effects of slowdown in agricultural sector. Higher food prices and large Government borrowing may result in higher interest rates derailing the ongoing improvements we are witnessing.Disclosure: No Positions
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