Archive for August 14th, 2008

EAC releases economic outlook 2008-09

August 14, 2008

The Prime Minister’s Economic Advisory Council released the economic outlook for 2008-09. Here are a few highlights:

The Council projects that the Indian economy will grow by 7.7 per cent during 2008/09. Considering the magnitude of the adverse economic developments in 2008, the projected drop from 9.0 per cent last year to 7.7 per cent this year is in fact modest.

Savings and Investment:
In 2008/09, the overall savings rate will for the first time in recent years be significantly lower than the investment rate – reflecting an expansion in the rate of net absorption of foreign savings (that is, the current account deficit).

Current Account Deficit
The projected value of merchandise exports and imports is $ 208 and $342
billion respectively, leaving a BoP merchandise trade deficit of $134 billion, equivalent to 10.4 per cent of GDP, a sizeable increase from 7.7 and 7.1 percent in the last two years.
Total net invisibles are expected to increase by 27.5 per cent (compared to 31.4 per cent last year) to $92.7 billion. As a result the Current Account Deficit (CAD) is likely to expand to $41.5 billion, equivalent to 3.2 per cent of GDP – a major increase from 1.5 per cent of GDP in 2007/08. We estimate that the CAD/GDP ratio may be above 4.5 per cent

Capital Flows
Aggregate FDI inflows are estimated at $ 19.7 billion. Portfolio inflows
are estimated to be $4.1 billion in 2008/09, which is very large reduction from 2007/08. Net inflows on account of loans are expected to be $34 billion, about 19 per cent lower than in the previous year primarily due lower ECB/FCCB inflows. Net banking capital inflow and inflows under “other capital” are expected to be 50 percent lower than the previous year. Our estimate of total capital inflows in 2008/09 is $70.9 billion, which is 34 per cent less than in the previous year. This will however be more than adequate to finance the enlarged CAD, leaving about $29 billion to accrue in the foreign exchange reserves of the RBI.

The Council is of the view that co-ordinated policy action, coupled with some reinforcement of the recent cooling evident in world commodity prices and monetary actions by other central bankers can help bring the rate of inflation down by the end of March 2009 to 8 to 9 per cent. However in view of the large backlog of fuel price adjustments achieving a reduction to 7 per cent will take considerable effort and a confluence of favourable factors.

Fiscal Deficit
There are however serious fiscal risks arising from growing off-budget liabilities on account of fertiliser, food and oil, along with unbudgeted liabilities arising out of the farm loan waiver and NREGA schemes and the implementation of the Sixth central P ay Commission. These liabilities could amount to 5 per cent of the GDP in 2008/09, over and above the budgeted central fiscal deficit of 2.5 per cent.

So, after 5 year average of 8.8% EAC expects to see a 7.7% growth in 2008-09. The moderation seems to be hitting Indian economy. The savings are expected to decline and with similar investment levels, we should see more absorption of foreign savings and less of a problem for central bank.

What is more surprising is the way FII inflows have deserted Indian economy. The expected inflows are USD 4.1 bn lower than 29 bn received in 2007-08. I am wondering where did the India a sustainable growth story disappear? In these times we should see more inflows in equity markets as equity prices are much lower but what we see is the opposite. Does that mean Indian story has disappeared? No, it hasn’t as even with 7.7%, India will be one of the fastest growing economy in present times.

What is worrisome is also the fiscal deficit number. EAC says with all the off-balance sheet items, it is expected to be 7.5% of GDP (2.5% projected and 5% off-balance sheet items). This is indeed a very high figure and markets will be keenly looking for these numbers.

EAC also points to the inconsistency in the IIP numbers:

The fundamental problem with anecdotal evidence is its partial nature. It can therefore run counter to what a more broad-based indicator such as IIP would throw up. There are some problems associated with the antiquated base ye


It expects output growth in basic and intermediate goods at a pace possibly higher than being reported by the IIP. For example, cement production data shows growth of over 14 per cent in the April–June quarter of 2008/09, while the IIP data for the corresponding 2-digit category (non-metallic minerals) reports growth of 1.4 per cent during April & May 2008.  

ar. Clearly, the IIP base year and classification categories are in need of urgent revamp.

I have posted earlier about the need to revamp IIP indices but my arguement was mainly consumer durable goods.  Most consumer durable goods consumed now  like DVD players, mobile phones etc are not part of the index. Likewise, capital goods required to produce these items are also missing. So, we see a much lower growth in consumer items. Now, with these classification problems, it seems the growth is higher than the released figure.

Assorted Links

August 14, 2008

1. WSJ Blog points to Greenspan interview. It also points inflation hawks in US appear subdued.

2. TTR points to failings of HBS.

3. ACB points – “even our best institutes produce indifferent research”

4. NB points to a speech favoring applying beh eco to social security

5. PSD Blog points Financing the next Silicon Valley.

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