Friday, February 26, 2010

India Q4 GDP Slows to 6%, but Government Pledges Deficit Trimming Which Buoys Market

India's still heavily dependent on agriculture economy suffered through a weak monsoon season and GDP came in at only 6% versus 7.9% the previous quarter.  [Nov 20, 2009: India's Q3 2009 GDP Jumps to 7.9%, Highest in 6 Months. Stimulus Could be Exiting Stage Right] However, a forecast for higher growth in the current quarter & a government pledge to address the deficit seemed to placate investors - we'll see how those promises work out in due time.  For now, words are enough.

Via Bloomberg:
  • India’s expansion slowed in the fourth quarter, reflecting a poor monsoon rainfall that hurt farm output, underscoring the influence of agriculture in a nation aiming to become the world’s fastest growing economy.
  • Gross domestic product grew 6 percent from a year earlier after gaining 7.9 percent in the previous quarter, the Central Statistical Organisation said in New Delhi today.
  • The government forecasts growth to quicken to 7.2 percent in the year to March.
  • The one-off drop in GDP is due to agriculture and not a reflection of trend growth, which is strong,” said Rahul Bajoria, an economist at Barclays Capital in Singapore. “Tackling inflation and curbing the fiscal deficit will be a major policy challenge in the short term.”
  • Agricultural output fell 2.8 percent in the quarter ended Dec. 31, today’s report showed. Manufacturing gained 14.3 percent, the most since March 2007, while hotel, transport and communication services increased 10 percent, according to the report.
  • Mukherjee may raise excise and service tax to curb excessive consumer demand from accelerating inflation, which touched 8.6 percent in January, the most in 15 months, economists said.  (very few countries on earth have this sort of problem right now

Bloomberg on the new deficit pledges:
  • India’s government pledged to shrink its budget deficit by more than one percentage point of gross domestic product this year from the highest level since 1994, spurring a rally in the nation’s stocks.
  • Finance Minister Pranab Mukherjee, presenting the annual budget to parliament, said he plans to narrow the gap to 5.5 percent of GDP in the year starting April 1 from 6.9 percent the previous year.
  • He also said economic growth may reach 10 percent in “not-too-distant future.”
  • Mukherjee outlined tax increases -- including a fuel levy that prompted opposition lawmakers to storm out of the building -- and 400 billion rupees ($9 billion) of state asset sales in his budget. The effort may help bolster investor confidence in India, which has the lowest sovereign-debt rating among the BRIC nations that include Brazil, Russia and China.
  • “The headline numbers are encouraging,” Andrew Colquhoun, director at Fitch Ratings’s Asia-Pacific Sovereign Group in Hong Kong, said in an interview. “We are marginally less encouraged to go for a downgrade at this point,” referring to India’s sovereign-debt rating. Fitch’s local-currency grade is BBB-, the lowest investment grade.
  • Mukherjee raised the excise tax on almost all products to 10 percent from 8 percent in his budget.  The minister also increased the minimum alternative tax for companies to 18 percent from 15 percent and widened the net for services taxes to include electricity exchanges and real-estate companies.  (I guess there is no GOP in India ?)  Aiming to slow food inflation, Mukherjee removed the service tax from transporting cereals and pulses by road.
  • “Containing the budget deficit is a big deal,” said Harsh Pati Singhania, President of the New Delhi-based Federation of Indian Chambers of Commerce & Industry. “He has touched all the right buttons. The stimulus rollback is gradual and calibrated.”

Interesting to read how money is allocated in India's budget - the impact of fertilizer and agricultural subsidies is huge.  There was a fascinating story in the WSJ earlier this week on how the "urea" fertilizer lobby is dominant and the fertility of the land is degrading because the government subsidies have caused an over reliance on one nutrient at the expense of others.  So to get the same yield, even more urea is being used... so it's a self reinforcing death sprial.  Ah, politics....
  • Subsidies for food and fertilizer now consume 9 percent of the budget. With another 11 percent devoted to defense, 19 percent to pay interest on the national debt and 27 percent given to states as their share of the federal government’s revenue, that limits the capacity to spend for schools, power plants and other investments that can boost growth.

[Sep 30, 2009: India's Monsoon Season Driest in 3 Decades]
[Aug 7, 2009: India's Growth May Suffer Due to Weak Monsoon Season]

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