India inflation as measured by the WPI or Wholesale Price Inflation for the month of August 2011 came in at 9.78% as against a level of 9.22% seen in July 2011. The rise in inflation by 0.58% month on month is accounted for by a sharp rise in primary article inflation over the month of July to August. Primary article (weight of 20% in the WPI) inflation went up by almost 300bps from July to August due to rise in prices of food. Food inflation went up by over 225bps from July to August to lead the primary article inflation higher. The period of June to September is a monsoon period and food prices rise due to supply disruptions. The monsoon in India for 2011 was 3% above normal as per the IMD (Indian Meteorological Department) and this usually bodes well for food supply and food prices are expected to come down post monsoons. Manufacturing inflation (weight of 65% in the WPI) was up by 7.79% in August against 7.49% seen in July 2011 and did not prove to be a large factor in the rise in the WPI for August.
Inflation indicators are pointing down. Industrial production growth as measured by the IIP or Index of Industrial Production came in at 3.3% for the month of July 2011 against a growth rate of 8.8% seen in June 2011. The April-July 2011 IIP growth is at 5.8% against a growth rate of 7.8% seen in the same period last year.
Liquidity in the banking system continues to be in deficit with banks borrowing an average of around Rs 50,000 crores from the RBI on a daily basis. Tight banking system liquidity restricts banks from growing their loan books leading to lower credit off take. Credit growth has come off from 23% levels to 20% levels over the last six months. High rates of interest are impeding credit demand. Borrowing costs for consumers as well as the industry has gone up by around 250bps to 400bps over the last one year. Lower credit off take is good for inflation as it lowers aggregate demand in the economy.
On the external front India’s exports for August 2011 at USD 24.3 billion was down 17% month on month leading to worries of global economic slowdown weighing on trade. Imports were down by 4.95% leading to the trade balance moving up by 27% month on month. Slowing exports may weigh on the CAD (Current Account Deficit), which closed 2010-11 at 2.6% of GDP from earlier estimates of over 3% of GDP.
Global Economy
The global economy is weakening. The GDP growth forecast for the US for 2011 have been revised downwards by 110bps from 2.8% to 1.7% by economists. The second quarter 2011 GDP growth for Germany at 0.1% and France at 0% against first quarter 2011 growth of 1.3% and 0.9% respectively suggest that Eurozone weakness is feeding into the largest economies in the Eurozone. The worries on sovereign debt in countries of Greece, Spain, Italy, Portugal and Ireland are forcing these countries to adopt austerity measures to bring down debt. The austerity measures adopted by these countries will bring down GDP growth in these countries leading to an overall weakness in Eurozone growth. The second half of 2011 may well see the Eurozone contracting if growth in Germany and France does not pick up.
On the data front, US job growth was flat in August leaving unemployment rate unchanged at 9.1%. US manufacturing growth slowed to its lowest level in two years in August while consumer confidence dropped to two year lows. The US is forced to adopt spending cuts to bring down its debt in the face of weak economic growth. The US president unveiled a USD 440 billion job plan that is expected to create jobs and bring down unemployment. The plan will be financed by higher taxes on the high earners. Government taking money away from the private sector to the public sector is not the best option given the inefficiencies of the public sector.
German manufacturing growth in August 2011 hit a twenty three month low while business confidence fell to its lowest since 2008. German exports fell in July for the second consecutive month leading to worries on economic slowdown effects on trade.
China’s inflation for August 2011 came in at 6.2%, down from 6.4% seen in July 2011. China manufacturing growth data for August was at a twenty nine month low. China’s trade balance fell sharply by almost 50% from July to August as imports widened. Rising imports suggest good domestic demand in China reducing fears of a hard landing. China has tightened monetary policy to combat inflation, which is trending close to multi year highs.
