India's GDP and Inflation Outlook for 2009-10
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On November 16, 2009, the Reserve Bank of India released the economic survey results which gives the expectations on GDP, inflation and other key macro economic indicators. The survey gives the expectations of 21 professional forecasters. Discussed in this article are some of the key macro indicators and their expected trend in 2009-10 and 2010-11.
GDP Forecast for India
GDP Forecast for India
Forecasters have revised their real GDP growth rate downwards to 6.0% in 2009-10 from 6.5% in the last survey. The highest probability of 37.5 % is assigned to growth range of 6.0-6.4% for the year 2009-10.
For the year 2009-10, the forecast for agriculture has been revised downwards from 2.5% to (-) 1.4%. For industry, the forecasts have been revised upwards from 4.8% to 6.3% whereas for the services sector, there was modest downward revision from 8.3% in the earlier survey to 8.1% in the current survey.
For the year 2010-11, the forecasters have assigned highest probability of 49.3% to 7.5-7.9% growth range for GDP.
Inflation Forecast for India
Forecasters’ median estimates for WPI inflation in the third and fourth quarters of current financial year are at 4.0 and 6.8%, respectively which have been revised upwards from 2.5% and 5.4% respectively in the last survey. So we can expect a interest rate hike by the RBI relatively soon as it intends to stay ahead of the curve.
The forecasters expect end period repo rate and reverse repo rate to be at 5.0% and 3.5 respectively in 2009-10, which are same as expected in the last survey.
Forecasters have assigned highest 34.3% chance that inflation will be in the range 6.0-6.9% in 2009-10 and highest 38.8% chance that it will fall in 5.0-5.9% in 2010-11.
In my opinion, the decline in inflation expectations for 2010-11 is promairly due to the expectation that food prices would decline by then. I don't personally see the commodity (industrial) prices falling sharply in the forseeable future.
Corporate Profit Growth Forecast
The profit growth of corporate sector in 2009-10 has been revised upwards to 10.0% from 7.5% in the last survey. The growth in profit is expected to be 14.5% in 2010-11, which has been revised marginally downwards from 15.0% in the last survey.
Thus, the corporate profit growth forecast remains robust. In my opinion, high inflation, lead by high crude oil and industrial commodity prices can lead to a downward revision in the corporate profit forecast. The inflation expectation largely depends on the monetary policies of the U.S. and Europe as near zero rates are leading to speculation in commodities thereby fuelling inflation.
Forecast for Fiscal Deficits
Central Government fiscal deficit is placed at 7.0% of GDP in 2009-10, which is revised upwards from 6.8% in the last survey. The combined gross fiscal deficit is placed at 11.0% of GDP, revised upwards from 10.1% in the last survey.
Even at these levels, I think that fiscal deficits are not a matter of concern for India. Rapid GDP growth, disinvestment programs and recovery in exports (if the Western world recovery is sustainable) will lead to decline in the deficits.
Outlook for Exports and Imports
Exports are expected to contract by 5.0% in the current financial year, revised downwards from (-) 0.5% in the last survey. Imports are expected to contract by 15.7% in 2009-10, revised further downwards from (-) 3.5% in the last survey. Net surplus under invisibles is placed at US$ 83.1 billion in 2009-10 against US$ 80.9 billion in the last survey.
M3 and Credit Growth Forecast
Broad money (M3) growth is revised upwards to 19.0% in 2009-10 from the earlier forecast of 18.0%. In 2009-10, bank credit is expected to grow at the rate of 17.0% as against its previous forecast of 18.0%. The mean forecast for bank credit growth for 2010-11 is expected to be even better at 20.2%.
In my opinion, a credit growth of 17% is excellent when the banking sector globally has become risk averse. The credit growth is an indicator of the robustness of the Indian Banking system. I hope we learn the lessons from the U.S. Banking crisis and have a banking system which always remains strong.
Domestic Savings and Capital Formation
The proportion of domestic saving to GDP is indicated to be 33.6% in 2009-10, revised downwards from 35.0% in the last survey.
Forecasters expect gross domestic capital formation to contribute 37.3% of real GDP in 2009-10 (36.6% in last survey), while contribution of gross fixed capital formation is expected to be 33.5 per cent (revised downwards from 35.1% in the last survey).
The forecasters have predicted private final consumption expenditure to grow at the rate of 7.0% which is same as in the last survey.
Long Term GDP and Inflation Forecast for India
Implications for the Equity Markets
In my opinion, the Indian stock markets have already priced in all the good news. The downward revision in GDP forecast might have acted as a dampner to market sentiments but that was not the case. There is huge amount of liquidity in the system and that can support markets even at these levels which seem to be expensive.
However, I believe we have a correction coming and it could be a meaningful correction. So I would not take any fresh exposure in the markets. In my opinion, traders can book profits and be largely in cash and invest at lower levels.
I would also like to emphasize that there is no probability of the markets crashing. If we have a 15-20% correction then it might be a good buy opportunity. The ample liquidity in the financial system will prevent any asset class from falling substantially.
However, this does not mean that things are looking great globally in terms of economic activity. There is an increasing disconnect between asset markets and the real economy.
Summary of Key Macro Economic Indicators for 2009-10
Rakesh Jhunjhunwala on Stock Selection
I came across a nice interview of Rakesh Jhunjhunwala on moneycontrol in which he talks about stock picking strategies. The link for the same is given below:
Rakesh Jhunjhunwala Interview
Book Review
I would recommend the book "The Great Crash of 1929" for every investor. The aspects discussed in the book on the crash of 1929 have striking resemblance to the Financial Crisis of 2009. I have written a review of the book recently. To know more about the book visit:
Book Review: The Great Crash of 1929
Source: RBI
For the year 2009-10, the forecast for agriculture has been revised downwards from 2.5% to (-) 1.4%. For industry, the forecasts have been revised upwards from 4.8% to 6.3% whereas for the services sector, there was modest downward revision from 8.3% in the earlier survey to 8.1% in the current survey.
For the year 2010-11, the forecasters have assigned highest probability of 49.3% to 7.5-7.9% growth range for GDP.
Inflation Forecast for India
Forecasters’ median estimates for WPI inflation in the third and fourth quarters of current financial year are at 4.0 and 6.8%, respectively which have been revised upwards from 2.5% and 5.4% respectively in the last survey. So we can expect a interest rate hike by the RBI relatively soon as it intends to stay ahead of the curve.
The forecasters expect end period repo rate and reverse repo rate to be at 5.0% and 3.5 respectively in 2009-10, which are same as expected in the last survey.
Forecasters have assigned highest 34.3% chance that inflation will be in the range 6.0-6.9% in 2009-10 and highest 38.8% chance that it will fall in 5.0-5.9% in 2010-11.
In my opinion, the decline in inflation expectations for 2010-11 is promairly due to the expectation that food prices would decline by then. I don't personally see the commodity (industrial) prices falling sharply in the forseeable future.
Corporate Profit Growth Forecast
The profit growth of corporate sector in 2009-10 has been revised upwards to 10.0% from 7.5% in the last survey. The growth in profit is expected to be 14.5% in 2010-11, which has been revised marginally downwards from 15.0% in the last survey.
Thus, the corporate profit growth forecast remains robust. In my opinion, high inflation, lead by high crude oil and industrial commodity prices can lead to a downward revision in the corporate profit forecast. The inflation expectation largely depends on the monetary policies of the U.S. and Europe as near zero rates are leading to speculation in commodities thereby fuelling inflation.
Forecast for Fiscal Deficits
Central Government fiscal deficit is placed at 7.0% of GDP in 2009-10, which is revised upwards from 6.8% in the last survey. The combined gross fiscal deficit is placed at 11.0% of GDP, revised upwards from 10.1% in the last survey.
Even at these levels, I think that fiscal deficits are not a matter of concern for India. Rapid GDP growth, disinvestment programs and recovery in exports (if the Western world recovery is sustainable) will lead to decline in the deficits.
Outlook for Exports and Imports
Exports are expected to contract by 5.0% in the current financial year, revised downwards from (-) 0.5% in the last survey. Imports are expected to contract by 15.7% in 2009-10, revised further downwards from (-) 3.5% in the last survey. Net surplus under invisibles is placed at US$ 83.1 billion in 2009-10 against US$ 80.9 billion in the last survey.
M3 and Credit Growth Forecast
Broad money (M3) growth is revised upwards to 19.0% in 2009-10 from the earlier forecast of 18.0%. In 2009-10, bank credit is expected to grow at the rate of 17.0% as against its previous forecast of 18.0%. The mean forecast for bank credit growth for 2010-11 is expected to be even better at 20.2%.
In my opinion, a credit growth of 17% is excellent when the banking sector globally has become risk averse. The credit growth is an indicator of the robustness of the Indian Banking system. I hope we learn the lessons from the U.S. Banking crisis and have a banking system which always remains strong.
Domestic Savings and Capital Formation
The proportion of domestic saving to GDP is indicated to be 33.6% in 2009-10, revised downwards from 35.0% in the last survey.
Forecasters expect gross domestic capital formation to contribute 37.3% of real GDP in 2009-10 (36.6% in last survey), while contribution of gross fixed capital formation is expected to be 33.5 per cent (revised downwards from 35.1% in the last survey).
The forecasters have predicted private final consumption expenditure to grow at the rate of 7.0% which is same as in the last survey.
Long Term GDP and Inflation Forecast for India
- Long term forecast for real GDP for the next five years is 7.5% which remains the same as in the last survey. For the next ten years, the GDP is expected to grow at 7.8% revised downwards from 8.0% in the last survey.
- Over the next five years, the forecasters expect WPI inflation to be 5.5% which is revised upwards from 5.3% in the last survey. CPI-IW inflation has also been revised slighly upwards to 6.5% in this survey from 6.0% in the last survey. Over the next ten years, WPI and CPI-IW based inflation are expected to be 4.8 and 5.8%, respectively.
Implications for the Equity Markets
In my opinion, the Indian stock markets have already priced in all the good news. The downward revision in GDP forecast might have acted as a dampner to market sentiments but that was not the case. There is huge amount of liquidity in the system and that can support markets even at these levels which seem to be expensive.
However, I believe we have a correction coming and it could be a meaningful correction. So I would not take any fresh exposure in the markets. In my opinion, traders can book profits and be largely in cash and invest at lower levels.
I would also like to emphasize that there is no probability of the markets crashing. If we have a 15-20% correction then it might be a good buy opportunity. The ample liquidity in the financial system will prevent any asset class from falling substantially.
However, this does not mean that things are looking great globally in terms of economic activity. There is an increasing disconnect between asset markets and the real economy.
Summary of Key Macro Economic Indicators for 2009-10
(open in new window for clear view)
Source: RBI
I came across a nice interview of Rakesh Jhunjhunwala on moneycontrol in which he talks about stock picking strategies. The link for the same is given below:
Rakesh Jhunjhunwala Interview
Book Review
I would recommend the book "The Great Crash of 1929" for every investor. The aspects discussed in the book on the crash of 1929 have striking resemblance to the Financial Crisis of 2009. I have written a review of the book recently. To know more about the book visit:
Book Review: The Great Crash of 1929
I am inclined to fully agree with you that there is a meaningful correction waiting in the wings. This is expected to take place after Nifty climbs into the selling zone roughly between 5300 and 5500. Meaningful correction from this selling zone should be in the range of 1500 Nifty points, which means that we may have to witness Nifty trading at 4000 before the next bullish impulse wave kicks off.
yes Archana a correction would be a trigger for further upside in the markets...There is lot of cash in the sidelines...if you look at the Indian MF data, they are not really buying into equities for the past one month...But they are heavily investing in debt instruments...
In my opinion, if we do get a meaningful correction, a lot of these funds will come back to equities...
Hi Faisal,
This post is like an alarm bell for all investors. Thanks a lot for that.
I have one very basic question. In all the places Fiscal Deficit is expressed as a percentage of GDP. What does it mean? How should we arrive at the numbers?
Thanks,
Madan Kumar Rajan
Hi Madan,
Fiscal deficit is simply the excess of government expenditure over its revenue.
It is generally talked about as a percentage of GDP...So generally speaking, higher the fiscal deficit as a percent of GDP, the riskier it is for the country...
Since GDP is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, the expression as a percent of GDP makes sense in terms of a countries asset base and repayment capabilities....
Thanks for your answer Faisal. :)
- Madan Kumar Rajan
You said, "The inflation expectation largely depends on the monetary policies of the U.S. and Europe as near zero rates are leading to speculation in commodities thereby fuelling inflation." which is true, although many investors are also betting on a recovery. Wall Street has sold the notion of investing in Oil like Gold.
Question: Do you feel the US zero interest rate policy pushs oil prices up in India as it does in USA? Given the dollar has tumbled againest other world currencies ( except China, as the communist have shrewdly peg their currency to the dollar)has not The Rupee climb in value againest the dollar over the last 5 years? And if yes wouldn't the price of Gas at the India pump be about the same price as 2-3 years ago?
Thanks...you brought out some excellent points...If we look at the Indian Rupee, the appreciation has not been significant as the Indian Government is also bent on keeping the Rupee artifically low in order to help the IT outsourcing and the Services sector at large...
However, I would like to bring another interesting point here...That is about subsidies...When the oil prices flare up then the Government gives subsidies to the consumers and for them the prices are almost the same or rise by a much lower amount...
However, these subsidies build on the Government balance sheet and it is the comsumers only who have to pay for it sooner or later...
Also, inflation can impact consumers in different ways.For example - before the credit crisis also, there was excess liquidity and huge amount of speculative buying was seen in the Indian Real Estate Market...This pushed up the prices and made it beyond the reach of many middl class Indian families...and as you know the bank loan is a big trap...
So easy money can impact asset prices and standsrds of living in some other country also in a variety of ways...
Very interesting that India has subsidies on Gas...I believe China does the same...I can understand an Oil rich country with Gas subsidies but it's counter productive in countries with large populations where fuel conservation should take a higher priority given our declining world suppies of oil and enviormental issues. I supported Ross Perot's bid for Pres. in early 90's and his desire to have a national 50 cent a gal tax to be used to reduce the National debt (L.O.L. which we thought was out of control then)and to force America to think more about fuel economy. Instead as gas declined in price after the little 92 short-term World crisis with Iraq we built big gas guzzeling SUVs. And now the price of Oil has tripled and GM is BK. This maybe a prime example of how a short-run benefit of cheap fuel ends up producing a long-run crisis. I'm sure many countries political people like to use the gas subsidies to win votes. And I agree with you pushing real-estate prices higher and higher only benefits the older owners not the younger first time buyers. We should all learn from what happen in the Tokyo Japan Real-Estate market in the late 80's early 90's.
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