Author: CP

The general government fiscal deficit will rise from 6.2% of GDP in FY08 to 10.2% of GDP in FY09 and forecast it to remain high at 10% of GDP in FY10. Both the state and central deficits are likely to increase as revenues slump due to the slowdown in economic growth. Tax revenues fell 19% yoy in December 2008 compared to a rise of 34% yoy in December 2007.

Expenses on the other hand, are likely to remain elevated in FY10, given that many of the expenditure commitments of FY09 such as the Sixth Pay Commission pay hike arrears, farm loan waiver and the National Rural Employment Guarantee program will spill over into FY10.

The government has already overshot its borrowing plan this year by US$25 billion to a total of US$47 billion. Net borrowings forecast for FY10 to be even higher at US$55 billion due to the central government’s deficit remaining high. This is likely to steepen the yield curve. Also note that, Money supply growth continued to fall as growth in private-sector lending and net FX assets of the banking sector declined. Inflation continued its downward march.

For Dec 08, growth in industrial production, at -2.0%.

Industrial production was also affected due to a high base in Dec 07. Although there has a y-o-y decline, there was a significant improvement on a m-o-m basis. Mining and electricity stayed positive at 1.0% and 1.6%, respectively, whereas manufacturing reported a negative number (2.5%) for Dec 08.

There has been a decline in food products, machinery and transport equipment in the manufactured sectors, which contributes 80% of industrial production. In the use based category, there has been a decline in consumer durables and intermediate goods. Consumer durables is correcting faster than expected.

Given that manufacturing activity is more exposed to international demand, the results show that the serious global demand destruction has affected India. The ministry of commerce had earlier mentioned that there might have been a 20% decline of exports in Jan 09.

A look at recent activity indicators. The January reading of our India Surprise Index1 points to a fourth consecutive month of negative surprises, impacting asset prices. Other indicators of activity also show across the board weakness.

Other indicators to note: Foreign exchange reserves rose by US$1 billion after falling sharply by US$4.6 billion in the previous week. After a fortnight of interruption due to a trucker’s strike, WPI inflation started to move down again to 5.1%. Money market spreads have been moving lower since the start of the year, but are still high compared to pre-crisis levels.

Although industrial production growth was stronger than expected, exports and motor sales data was very weak. Exports fell 9.9% yoy and motor sales fell 11.8% yoy, pulling the surprise index down. The PMI Index contracted for a third consecutive month in January, although at 46.7 it rose slightly from the low of 44.4 in December. Domestic data on tax collections, commercial vehicle sales and domestic airline traffic fell rapidly.

Real policy rates are still high in India compared to the region, and we think that the RBI will cut rates further in the face of declining activity. Watch out for our preview on the budget, coming up soon.