India GDP Q1 2008

India's economic growth has slowed somewhat of late and held at its weakest pace since 2005 in Q1 2008 as the highest interest rates in six years discouraged consumer spending and investment, while a more complex global environment reduced the possibilities for expanding India's exports. India's economy expanded at a year on year rate of 8.8 percent in the three months to March 31, matching the revised gain of the previous quarter, the statistics office said in a statement in New Delhi yesterday.




These numbers are hardly indication of a dramatic slowdown, and are still above numbers that people would have been describing as "overheating" only a couple of years ago, but still India is a poor country and population growth is still rapid, so getting headline GDP growth is something of a priority, although the trick is to get it without the accomapnying inflation, especially given what is happening to global food and energy prices.

Naturally the data is producing all manner of reactions, with Finance Minister Palaniappan Chidambaram urging policy makers at the central bank to ensure they don't damp economic growth as they try to slow inflation (which of course has doubled in the past four months to over 8 percent). India's central bank has twice forced banks to set aside more reserves in 2008, after raising its key interest rate seven times in the past 2 1/2 years to 7.75 percent.

The Bank however will take there own view, and are, in my opinion, likely to continue to act to try to contain inflation - which is no easy matter - since if they do not accomplish this it will be hard to sustain the economic growth that everyone so much wants in the longer term.


India's economy expanded 9 percent in the year ended March 31, which is the slowest rate since 2005, according to yesterday's report, but again the order of magnitude in the reduction is small. Growth may slow further to about 8.5 percent in the current financial year, Chidambaram told reporters in New Delhi today.

Manufacturing growth almost halved to 5.8 percent in the three months to March 31, while farm production slowed to 2.9 percent. Growth is holding up as construction gained 12.6 percent, the fastest pace in almost two years, as the government stepped up efforts to build new airports, roads and power plants.

In an attempt to boost growth, the finance ministry this week raised the limit on overseas borrowing by companies for domestic spending. Infrastructure companies can borrow as much as $100 million overseas, up from a previous limit of $20 million, while other companies can borrow as much as $50 million, compared with an earlier cap of $20 million.

Rice Production In Kerala

In an attempt to ensure it can feed India's 600 million poor, the government banned rice exports on April 1, contributing to a shortage on world markets that drove the price of the grain to a record last month and sparked food riots from Haiti to Egypt. The curb caused local prices to lag behind the international increase, encouraging some Indian farmers to switch to more lucrative crops thus further reducing supply.

Kerala offers us one example of what has been happening in this context, since the area growing rice in Kerala has fallen to 276,000 hectares (682,000 acres) in 2006 from 801,700 hectares in 1980, according to the state's Planning Board. Production almost halved to 630,000 tons from 1.27 million during the same period.

The price of rough rice has almost tripled in the past two years, reaching a record $25.07 a 100 pounds on April 24 on the Chicago Board of Trade. It closed at $20.35 a 100 pounds on May 23. In India, rice sells for 18 rupees a kilogram (19 cents a pound) at local markets, and government-run stores distribute it to the poor for a sixth of that price.

Some farmers in Keral have switched to producing rubber since rubber prices rose to a record 123 rupees a kilo in Kerala after crude oil prices more than doubled in a year, according to the government's Rubber Board. The state accounts for more than 90 percent of the natural rubber produced in India, the world's fourth-biggest grower.



The tropical climate in Kerala is ideal for rubber, helping growers achieve an average yield of 1,879 kilograms a hectare, the highest in the world. The area producing rubber has almost doubled to 494,400 hectares during the past 25 years, according to the Planning Board. Still, government curbs on converting paddy land to cash crops do mean that farmers are holding back.

Since 2002, the local government has required paddy farmers to obtain permission to put their farmland to other uses, though construction of houses is permitted in small plots.

The order restricting land use seems not to have been very effective since it isn't widely enforced according to K. Jayakumar, Kerala's agriculture production commissioner. The state plans to introduce rules that will prevent the use of wetland for purposes other than rice.

Labour Shortage?

The prospect of spending six months of the year knee-deep in brown paddy water for scant reward is steadily encouraging rice farmers to abandon their land. About 2.5 million people, or a 10th of the state's population, now work in the Middle East, where they help build apartments, hotels and offices. The exodus has led to a tripling of wages for day laborers who stayed behind, and fueled a building boom on drained paddy fields as engineers, surveyors and construction workers send money back.

Maybe it is worth remembering here that fertility in Kerala has been below replacement level since the 1990s, and it is not clear how or why a state which isn't reproducing itself is able to export labour.

At least 60 percent of the land traditionally used for rice in the Palakkad district, about 110 kilometers northeast of Kochi, Kerala's largest city, has been lost to other crops and to the construction of homes, villas and shopping malls.

The share of agricultural land devoted to food crops, including rice, fell to 12.5 percent in the year ended March 31, 2006, from 37.5 percent in 1981.


A detailed account of how a very similar pathology is leading to very substantial problems in Vietnam can be found in this lengthy post here.

India Inflation May 10 2008

India's inflation held above the central bank's target for a third straight month at the start of May, raising the distinct possibility that commercial lenders may be ordered to increase reserves for a third time this year. Wholesale prices rose 7.82 percent in the week ended May 10 from a year earlier, after gaining 7.83 percent in the previous week,



In fact it is quite likely that inflation is rather higher than this as the government is likely to revise the preliminary wholesale-price estimate in two months after receiving additional data. The commerce ministry today reported that the inflation rate broke the psychological threshold of 8% in the week ended March 15 revising its figure for the week to 8.02 percent, the highest since September 2004, and up from the earlier estimate of 6.68 percent.

The index of fuel products, with 14 percent weight in the inflation basket, rose 7.39 percent in the week ended May 10 from a year earlier, today's report showed. Prices of aviation turbine fuel rose 10 percent. The manufactured price inflation rose 7.73 percent.


With inflation having held above the Reserve Bank of India's target for a third straight month now, it seems likely that commercial lenders will once more be obliged to increase their reserves with the central bank, and if this happens it will be the third time this has happened this year. The Reserve Bank last month twice asked lenders to set aside more funds, raising its cash reserve ratio to 8.25 percent, the highest since March 2001, from 7.5 percent. With inflation actually now possibly running at close to 9% (when the data are ultimately revised I suspect that this is the sort of number we will see) and the repurchase rate at 7.25 percent, India presently has a negative interest rate of around 1.75%, which is very accomodative given the current inflation. Of course the reason the bank is relying on reserve increases to try to slow lending is obvious, since increasing the repo rate will only make "carry" more attractive, and possibly increase inflationary pressures by attracting even more funds, as Stephen Jen argues forcefully in this posting on the Morgan Stanley Global Economic Forum. The only other serious demand management tool the Singh administration has at its disposal I think is the fiscal deficit situation, and this should be being given much more importance.


India's Foreign Exchange Reserves

India's foreign exchange reserves rose again in the week ending May 16 to US$314.08 billion up from the US$312.50 billion registered a week earlier, according to the latest data in the Weekly Statistical Supplement released by the Reserve Bank of India on Friday.

Foreign currency reserve assets rose to US$304.11 billion from US$302.57 billion. Meanwhile, gold reserves remained unchanged at US$9.42 billion. Special Drawing Rights, or SDRs, decreased to US$11 million, down from from US$18 million. India's reserve position with the International Monetary Fund grew during the week to US$525 million.





The Rupee


The rupee declined for the fifth consecutive week this weeking, stringing together the worst run in almost two years, as record crude oil costs spurred demand for dollars needed to buy it. The rupee was down 0.5 percent on the week closing at 42.705 to the dollar at the 5 p.m. on Friday in Mumbai.




The rupee thus fell to its lowest level since April 2007 as companies paid more for the raw materials they need. Higher oil costs may well continue to slow growth in India's economy, which depends on imports to meet three-quarters of its annual energy needs.

The current-account shortfall widened to $5.4 billion in the three months ended Dec. 31, from $3.7 billion a year earlier and $4.7 billion in the preceding quarter, the central bank said on March 31. That was after the country imported oil worth $71.8 billion in the year through March 31, 23.5 percent more than a year earlier.



Of course a lot on the rupee valuation and on the inflation front now depends on the future course of monetary policy at the Reserve Bank of India.

Fiscal Deficit

As well as a current account deficit which the IMF currently estimates at 3% of GDP for 2008, India is also running a fiscal deficit, and central bank Governor Yaga Venugopal Reddy is currently warning that the deficit continues to be high with some of the pressures on the shortfall still not being reflected in the data.

According to government auditors at the end of March India's budget deficit in the first 11 months of the fiscal year to Feb. 29 reached 73.4 percent of the annual target, but this may be understating the true position.

Finance Minister Palaniappan Chidambaram stated in February that India's budget deficit for the year to March 2009 is estimated at 2.5 percent of gross domestic product, compared with the revised estimate of 3.1 percent for the previous fiscal year.

India Inflation May 3 2008

India's inflation rate rose again in the week ended 3 May 2008, to the highest in 3 1/2 years, adding pressure on the central bank to raise borrowing costs further to tame prices. Wholesale prices gained 7.83 percent in the week ended May 3 from a year earlier, after climbing 7.61 percent in the previous week, the government said in a statement in New Delhi. In all probability the rate is now over 8% since today's inflation rate will undoubtedly be revised upwards in two months when India's government reviews the figures after receiving additional price data. The Commerce Ministry today increased the inflation rate for the week ended March 8 to 7.78 percent from 5.92 percent, and this kind of upward revision has been normal in recent weeks.



The price index for fruits, vegetables and other food items rose 0.5 percent in the week ended May 3 from the previous week, while that for manufactured products gained 0.3 percent.


The provisional inflation data based on wholesale price index (WPI) hasn’t crossed the sensitive 8% threshold yet, but the latest revision by a whopping 1.9% points in annual rate of inflation for the week ended March 8 make it not unreasonable to believe that inflation is now well above that mark.

In just two months, the inflation rate has risen by two percentage points - from 5.66% for the week ended February 16 to the present 7.83% for the week ended May 3. Delayed data about the revisions in metals prices among other items were blamed for the spike. The scale of the recent revisions suggests the inflation rate seen since March (the index rose 3.6% points during March-April) will almost certainly be up significantly be even when the final estimates for the month are eventually announced.


The rupee declined on the inflation news since it added to concerns that the central bank will be forced to raise interest rates from a six-year high just as economic growth is slowing. The rupee declined to as low as 42.915 against the dollar, the weakest since April 2007, after the inflation data. The yield on the benchmark 10-year bond rose to 7.95 percent, the highest in more than two weeks.

The central bank on April 29 kept its benchmark repurchase rate, or the overnight lending rate, at 7.75 percent. The government has persuaded steel and cement makers in the past week to cut prices and help slow inflation. India's central bank twice asked lenders to set aside more funds last month, raising the so-called cash reserve ratio to 8.25 percent, the highest since March 2001, from 7.5 percent.

Foreign Exchange Reserves

There has been a visible slowdown in RBI intervention in the forex markets of late. After two consecutive weeks of contraction in reserve accumulation, foreign exchange reserves rose only $200 million to touch $312.7 billion during the week ended May 9. The entire growth in reserves during the week was a result of growth in foreign currency assets.

All other components of reserves — gold, SDR and, reserves with IMF remained unchanged. Of late, though forex assets expressed in dollar terms are slowing down, those expressed in rupee terms continue to show growth. This could be interpreted as meaning that the central bank is accumulating currencies that are depreciating against the dollar.





The Rupee


The rupee declined for the fourth consecutive week this week on concern near-record oil prices will boost the import bill, widening the trade and current-account deficits.

The currency declined as much as 0.5 percent today to a 13- month low as demand for dollars needed to pay for crude oil increased after the commodity climbed to an all-time high of $126.98 per barrel this week. The rupee pared losses on speculation the government will ease curbs on overseas borrowings by companies, allowing more capital inflows.





The rupee weakened 2.2 percent to 42.5075 a dollar this week in Mumbai, adding to last week's 2.3 percent slide, the worst in a decade. It earlier dropped to 42.915, the lowest intraday level since April 12, 2007. The currency's 7.6 percent decline this year now makes the rupee the third- worst performance among the 10 most-traded Asian currencies after the South Korean won and the Thai baht.

The rupee has now fallen 8.1 percent over the past six months as crude oil has advanced 33 percent, boosting the value of India's oil imports to a record $8.6 billion in March. India depends on shipments from abroad to meet approximately three-quarters of its energy needs.



India's trade deficit widened to an all-time high of $25.4 billion in the three months through December, according to the central bank. The current-account shortfall, a measure of trade and investment flows, increased to $5.4 billion in the same quarter from $4.7 billion.


The annual pace of growth in India's industrial production more than halved to 3 percent in March from 8.6 percent in the previous month. The gain was the smallest since February 2002.