Highlights • Monetary policy and fiscal policy on hold, vote on account to give a boost • Pressure to cut interest rates further but RBI not showing much interest • Rate cuts by RBI, if at all, only by March • Manufacturing shows some recovery but likely to be a short term blip • Agri output likely to be hit by warm temperatures • Downturn hits hiring intentions, reverse migration hits villages • Exports head for further decline as foreign markets shrink • Firms look to domestic rural markets for growth Last month we wrote, it is time to get over our collective pessimism, and get on with the job. Companies like Hero Honda who have gone in for rural markets have outshone others who are still stuck on servicing consumers who need loans. Auto sector cleared five months inventory in December and continued to do well in January primarily due to price cuts and discounts. Telecom continues to add more than 10 million consumers on the network.

1. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
The Emerging Economy
– Monthly Newsletter from Indicus
Analytics
7th February 2009
Highlights
• Monetary policy and fiscal policy on hold, vote on
account to give a boost
• Pressure to cut interest rates further but RBI not
showing much interest
• Rate cuts by RBI, if at all, only by March
• Manufacturing shows some recovery but likely to be
a short term blip
• Agri output likely to be hit by warm temperatures
• Downturn hits hiring intentions, reverse migration
hits villages
• Exports head for further decline as foreign markets
shrink
• Firms look to domestic rural markets for growth
India: Kal, aaj aur kal
Last month we wrote, it is time to get over our collective
pessimism, and get on with the job. Companies like Hero
Honda who have gone in for rural markets have outshone
others who are still stuck on servicing consumers who need

2. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
loans. Auto sector cleared five months inventory in
December and continued to do well in January primarily due
to price cuts and discounts. Telecom continues to add more
than 10 million consumers on the network.
In times of slowdown, companies need to cut prices and
focus on areas where the demand is. International demand
growth will be lacklustre at best and likely to be negative.
The slowdown will get worse if firms do not respond – and
that is where the uncertainty in forecasting comes from.
Despite large uncleared inventories, and missing buyers, the
real-estate sector has not really reduced its prices (minor 5 to
10% cuts from astronomical peaks of the past will not do).
At the same time it is reeling under a severe credit crunch.
This crunch is then being transferred in many different ways
to the upstream manufacturing and service sector suppliers.
Merely easing liquidity will have little impact on the real-
estate/construction sectors.
Yes, it is better to take a hit and move-on rather than make a
profit on every single sale. If prices do not respond to
changing conditions, markets are not working properly, one
way or another the government will need to step in.
If the government responds as most corporate sector
economists want it to – increase expenditures and reduce
interest rates – sure we may go back to high growth for a
while. But that would be a very short term solution. This
downturn is a signal to (generally large) firms, that all is not
well with their decision-making and growth strategies.

3. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
Whatever the government does, it should not distort this
critical signal.
The vote-on-account is due on the 16th of Februrary 2009.
It is expected that further tax breaks will be given. If the
past is any indication, these breaks will be very sector
specific. Construction, IT sector, automobile, chemicals,
textiles, financial, etc. These sector specific stimuli have to
be thrown in the trash can. If tax breaks have to be given,
give it to everyone. Reduce service tax for everyone, reduce
income tax, reduce VAT. But do not give sector specific
advantages as they are highly distortionary.
Yet the news is not all bad. The ABN-AMRO PMI survey
(which we find a better indicator than the government’s own
IIP index) has shown a small rebound in prodution
worldwide in January. More interestingly, Indian
manufacturing has been the least hit out of all countries
surveyed.
For the year ahead, the RBI survey of professional
forecasters shows a wide range – minimum of 3.9% and a
maximum of 8%. While our forecasts are more in the 7%
growth zone for the year ahead, the 4% forecast is very
much in the domain of the possible. A drought, or sudden
shocks from the western financial world, or bad news from
India’s own unorganized sector could take it down.
Sumita Kale and Laveesh Bhandari
7th February 2009, Indicus Analytics

4. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
Dr. Sumita Kale is Chief Economist, and Laveesh Bhandari
is Director, Indicus Analytics. They can be contacted at
sumita@indicus.net and laveesh@indicus.net.
Economic Growth
• IIP for November showed a 2.4% growth over the
last year, in line with the Indicus forecast of 2.9%.
Manufacturing grew by 2.4%, mining by merely
0.5% and electricity by 3.1%.
• Electricity however performed worse in January,
generating only 1.38% more power than the
previous year.
• In December, infrastructure sectors grew by 2.3%,
compared to the 3.2% clocked in previous year. Coal
and cement were the star performers at 9.4% and
11.6% growth respectively.
• While cement exports declined, despatches for
December grew by 12.11%.
• The auto sector has seen a fresh spurt, with sales in
December zooming to clear five months of
inventory. Retail sales crossed 1.4 lakh vehicles,
beating the previous record of 1.31 lakh in
November 2007.
• January also saw good sales, when Maruti reported
its highest sales ever of 71,779 units, previous
highest of 71,772 in March 2007 – focus on rural
sector has seen the boost for Honda and Maruti,
other auto majors have not been so fortunate.

5. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
• ABN-AMRO PMI survey of 500 firms showed that
there was a slight rise in the index for January,
though the results still showed a contraction.
• India incidentally has seen the least contraction in
the PMI across all the countries surveyed by ABN-
AMRO. See reference below.
• 10.81 million wireless subscribers added to the
telecom market in December, compared to 10.35
million in November 08 and 8.17 million in
December 2007. Telecom density now 33.23%.
• Railway freight revenue has been slowing down –
13.39% growth in April-December compared to
14.35% in April-November. Net tonne kilometres
also slowed down to 6.39% Apr-Dec from 7.37% in
Apr-Nov.
• While rabi crop sowing has been on greater acreage
than last year in most crops, some crops like urad,
groundnut, safflower, sesamum have seen lower
acreage sown.
• Rise in January temperatures however do not augur
well for wheat crop, govt has been worried on this
score.
Read:
Rebound in PMI
Obama is Jamal
Inflation

6. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
• Consumer price rises have slowed down, with the
CPI AL and CPI IW indices dropping in December,
inflation however stayed high at 11.14% and 9.7%
respectively.
• Wholesale Price Index which had been dropping
since September, showed a rise again in January. The
drop from double-digit inflation in October to
around 5.5% levels in January has primarily been the
result of fuel price declines.
• Sugar, oil cakes and wheat are some commodities
whose prices have risen. Food articles inflation
stood at 11.17% for the week ending January 17th,
compared to 2.27% a year ago.
• Crude oil output has been slashed in January by
OPEC, aiming to stem the bleeding losses. India
plans to move to deregulate fuel prices, read link
below on the implications.
Read
Spell it out and stick with it
Interest Rates
Indian bond yields have been choppy since the
•
middle of December, with the 10 year benchmark
gilt hitting 5.0536 on 5th January and rising since
then to touch 6.2044 on 30th January.
• The new 10 year benchmark gilt 6.05% paper
maturing in 2019 has low volumes so far.

7. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
• The RBI held rates steady in its January end policy
review, though it has given all indications of further
cuts if needed. The liquidity generated with the
aggressive cuts in the last two months need to filter
through the system.
• Sharp differences in central bank responses now
emerge as economies battle their own woes – Bank
of England will slash rates to boost an economy that
is slated to be the worst performing economy in the
world (IMF sets growth at -2.8% in 2009-10), ECB
continues to be wary of reducing rates to historic
lows.
Read
Happy days are here again for the RBI
Bank of England to cut, ECB stands pat
Exchange Rates
• Exports in December fell by 1.1% in dollar terms
and grew by 22% in rupee terms thanks to the
depreciating rupee, while imports rose by 8.8% in
dollar terms and by 34.2% in rupee terms.
• While oil imports fell by 30.9% in dollar terms
reflecting the fall in crude oil prices, non-oil imports
were 31.9% higher in December compared to the
previous year, showing continued domestic demand.
• Trade deficit for April-December was estimated at
US$ 93.8 billion, higher than the US $ 59.98 billion
for the same period in the previous year.

8. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
The rupee has been falling since the low of 47.08 on
•
19th December to range around 49 to a dollar by the
end of January, its movement taking cues from the
stock market.
Read
Keep trading
The coming trade wars

9. Indicus Analytics, An Economics Research Firm
http://indicus.net/Newsletter/Emerging_Economy.aspx
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