Fearful Symmetry Nov 2011

8/3/2019 Fearful Symmetry Nov 2011

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Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

2

a monthly chronicle of the Indian economy

f ear f ul s y mmetr y

vital indicators: domestic capital goods output and changes in theinvestment share of GDP. Prospects for the basic balance comedown to India’s ability to attract both portfolio and banking inflows.That is a vulnerable position to inhabit when European banks are in adire situation and the global fund management community’s appetitefor emerging market risk is in serious question. f ear f ul s y mmetr y feels safe assuming that his assertion on European banking will notspark any informed controversy. The fact that European lenderscontribute almost one half of India’s foreign lending flows, and UKbanks contribute another quarter, is clearly cause for concern. Inthe portfolio space, while October was a decent month under thecircumstances, with foreign institutional investors (FIIs) acquiring anet O17bn of Indian equity and O14bn of Indian debt, it would beunwise to expect on-going reliability on this front. Looking at theyear to date performance of Indian equities (–29%) against MSCI

BRIC (–16% local currency terms), Eurostoxx (–19%), US S&P 500(–3%) and the Nikkei (–18%), and the beleaguered rupee (7% weakeragainst the US dollar since the beginning of August) highlightsthe potential problem. f ear f ul s y mmetr y has heard the dreaded‘stagflation’ moniker attached to India by more than one EM fundmanager. That is not a designation that encourages foreign investorsto form an orderly queue for the entry: more likely a disorderlyscramble for the exit. It has not yet come to that, and nor shouldit given the inflation story will correct soon enough, but for themoment India does not resemble a compelling ‘buy’.

• Turning specifically on the activity picture, industrial productioncontinues to underwhelm, even alarm, with its sluggish performance.Industrial production rose just 1.8%yr in September, down from 3.6%

in August. It recorded a 3.1% pace in Q3 down from 7.0% in the Junequarter. The deceleration has been concentrated in the capital goodsand infrastructure space, consistent with the above thesis of weakcapital inflows damaging the investment cycle. Consumer durableshave maintained an average pace in the high single digits, but withthe bellwether automobile sector seeing weak sales turnover, thisis unlikely to persist. The infrastructure subset slowed to 2.3%in September, after averaging 5%yr in the June quarter. f ear f ul

s y mmetr y argues that the official data is now validating the signalcoming from the manufacturing PMI since June.

• Away from manufacturing, the services PMI has slumped by 9 indexpoints in three readings. The pair of observations in contractionaryterritory seen in September and October is the first since the early2009. Over the history of the series, the headline measure hassunk below 50 in only two cycle phases: the GFC period and today.Historically, ‘mid-cycle’ lows have been in the region of 53. Theemployment sub-index of the services PMI has been below 50 forfour straight months, indicating that the labour market has beenloosening consistently since mid year. f ear f ul s y mmetr y’s perusal ofthe other key surveys (by the RBI and D&B) on business confidence,order books, capacity utilisation, price expectations, employmentplans, profitability, corporate margins and the availability of financeall point to an aggregate softening in conditions. Consumer spendingis also decelerating, with sales of passenger cars, two wheelers andmobile phone subscriptions all well down on the rates seen in thefirst half of the year.

• And finally to inflation, which true to both market expectations andthe RBI’s own thinking, remained elevated in headline terms in theOctober release(s). Headline WPI came in at 9.7%yr which is closeenough to the year to date trend, while non-food manufacturingprices rose 7.5%yr, 0.44%mth, 3.0% 3mth annualised and 2.6%

6mth annualised. The pulse of inflation was mixed across thevarious subsets, with the protein basket continuing to alarm thosewho insist on defining it as a predominantly demand driven series( f ear f ul s y mmetr y argues that the long run structural argument forthis position is clear but that supply is a more powerful influenceon the year to year inflation trend) and elaborately transformedmanufactures prices maintaining their subdued recent performance.At present, primary articles and fuel are contributing about 60% ofmonthly inflation, with neither category sensitive to interest rates.

• Obligatory Chinese comparison stat: Based on the most recentinternational survey data, you are 20 times more likely to run into anIndian resident at the cinema than you are their Chinese counterpart.

-20

-10

0

10

20

30

40

50

60

-10

-5

0

5

10

15

20

25

30

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

%yr%yrTotal (lhs)Infrastructure industries (lhs)Consumer durables (lhs)Capital goods (rhs)

Sources: CEIC, Westpac Economics. 3mma.

Indian industrial output

40

45

50

55

60

65

40

45

50

55

60

65

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

indexindex

ServicesCompositeManuf

Sources: CEIC, Markit.

India: business surveys show softer demand

Contributions to monthly WPI inflation

-2

-1

0

1

2

-2

-1

0

1

2

Jan-05 Jan-07 Jan-09 Jan-11

ppt

OtherEnergyFood- primaryFood - manuf

Non-food manufTotal

Sources: CEIC, Westpac.3 month averages.

ppt

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Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

3

Summary data

f ear f ul s y mmetr y

2011

Monthly Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Industrial production, of which 8.1 7.5 6.7 9.4 5.3 6.2 9.5 3.8 3.6 1.8 –Manufacturing 8.7 8.1 7.5 11.0 5.7 6.3 11.2 3.1 4.1 2.1 –

Electricity 5.9 10.5 6.8 7.2 6.5 10.3 7.9 13.1 9.5 9.0 –

Basic goods 7.8 7.7 5.6 6.5 7.2 7.5 7.8 9.5 5.2 4.5 –

Capital goods 20.2 5.4 –5.7 14.5 6.6 6.2 38.7 –13.8 4.1 –6.8 –

Intermediate goods 8.1 7.4 6.3 3.1 3.9 0.1 1.6 –0.5 1.9 1.5 –

Consumer durables 7.8 12.5 18.2 14.9 1.6 5.1 1.6 9.0 5.5 8.7 –

Manufacturing PMI (index) 56.7 56.8 57.9 57.9 58.0 57.5 55.3 53.6 52.6 50.4 52.0

New orders to inventories (ratio) 1.18 1.22 1.26 1.27 1.23 1.22 1.19 1.06 1.08 1.02 1.08

Services PMI (index) 54.5 54.8 55.9 55.8 55.1 53.0 54.0 55.3 52.9 50.5 49.9

Composite PMI employment (index) 51.2 51.2 51.2 52.3 51.8 51.6 51.5 50.2 49.3 48.9 18.9

Motor vehicle sales – total %yr 27.7 19.8 22.1 19.4 23.9 15.6 14.6 12.4 15.0 21.9 0.8

Two wheelers 28.7 20.3 22.9 18.7 27.3 16.5 15.5 14.7 18.3 26.5 3.5

Passenger cars 21.4 17.8 22.0 25.0 13.0 6.2 5.5 –5.7 –1.7 0.8 –19.0

New cellular phone subscription mn units 17.1 na 14.7 14.5 11.1 9.5 8.6 7.6 5.3 6.5 –

Dec Jan Feb Mar Apr May Jun Jul Aug Sep OctDomestic credit %yr 18.3 16.8 17.7 17.5 17.5 17.7 19.0 18.0 18.3 18.4 –

Commercial 22.7 21.4 21.7 21.0 21.4 21.1 21.2 18.9 19.5 19.5 –

Commercial non–food 27.6 23.0 23.0 21.3 22.4 22.1 20.3 18.2 20.1 19.3 –

Resident deposits %yr 19.1 16.1 16.6 16.0 18.0 17.5 18.3 17.4 18.0 17.4 –

Wholesale bank financing (% res. deposits) 2.38 2.52 2.46 2.56 2.51 2.60 2.71 2.82 2.99 – –

External commercial finance* USDbn 3.4 2.7 1.4 5.6 2.1 2.7 3.3 4.2 3.7 2.4 –

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct

Exports %yr 60.0 57.6 75.7 51.9 34.7 67.8 46.4 81.8 44.3 36.4 –Imports %yr 2.6 23.8 24.7 19.1 20.5 69.9 42.5 51.5 41.8 17.2 –

Non–oil imports %yr 2.7 28.8 30.1 3.5 12.7 77.7 47.8 58.1 39.5 18.2 –

Trade balance USDbn –2.6 –6.7 –4.9 –4.5 –12.3 –17.3 –7.7 –11.1 –14.0 –9.8 –

Foreign direct investment USDbn 2.0 1.0 1.3 1.1 3.1 4.7 5.7 1.1 2.8 1.8 –

Foreign portfolio investment USDbn –1.5 1.7 –1.6 0.1 3.5 –1.6 0.8 1.6 –1.8 –1.1 –

Net foreign official assets USDbn 289 294 294 296 303 301 304 310 316 317 –

Dec Jan Feb Mar Apr May Jun Jul Aug Sep OctWholesale price index %yr 9.4 9.5 9.5 9.7 9.7 9.6 9.5 9.4 9.8 9.7 9.7

Primary articles – food %yr 15.1 16.7 11.0 9.4 10.7 8.3 7.6 8.2 9.6 9.2 11.1

Primary articles – non–food incl. energy %yr 25.4 26.6 34.4 27.3 26.9 21.4 18.4 15.8 18.2 14.8 7.7

Manufactured products excl. food %yr 6.2 6.5 7.7 8.5 7.0 7.2 7.7 7.6 7.7 7.4 7.5

%3th annualised 6.0 10.5 14.9 17.8 14.8 10.4 5.9 2.3 1.8 0.7 3.0

%6th annualised 3.9 6.9 9.3 11.8 12.6 12.6 11.7 8.3 6.0 3.3 2.6

Dec Jan Feb Mar Apr May Jun Jul Aug Sep OctPolicy repo rate %pa 6.25 6.50 6.50 6.75 6.75 7.25 7.50 8.00 8.00 8.25 8.50

Policy reverse repo rate %pa 5.25 5.50 5.50 5.75 5.75 6.25 6.50 7.00 7.00 7.25 7.50

Call money (weighted avg) %pa 6.66 6.92 6.94 8.99 6.33 7.33 7.33 7.50 7.84 7.90 8.16

Cash reserve ratio % 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00

3mth Treasury bill %pa 7.19 7.23 7.14 7.31 7.52 8.14 8.19 8.39 8.39 8.44 8.65

12mth Treasury bill %pa 7.49 7.59 7.68 7.64 7.76 8.29 8.29 8.49 8.31 8.46 8.68

INR per USD 45.1 45.4 45.4 44.9 44.3 44.9 44.8 44.4 45.3 47.6 49.2

Nominal effective exchange rate index^ 89.8 88.4 87.6 87.6 87.5 86.3 86.3 87.0 85.0 82.8 80.8

Real effective exchange rate index^ 108.5 108.4 106.7 107.0 108.3 106.5 107.2 108.7 106.3 103.7 101.6

Bombay Sensex 30 20,509 18,328 17,823 19,445 19,136 18,503 18,846 18,197 16,677 16,454 17,705

NIFTY 50 6,135 5,506 5,333 5,834 5,750 5,560 5,647 5,482 5,001 4,943 5,327Foreign instit. investment net debt INRbn 12 102 13 –0.1 –0.2 23 3 26 29 –17 14

Foreign instit. investment net equity INRbn 20 –48 –46 69 72 –66 46 80 –108 –2 17

Sources: CEIC, Westpac Economics, government agencies. *Sum of foreign currency convertible bonds and external commercial borrowings. ̂ Broad BIS measures.

8/3/2019 Fearful Symmetry Nov 2011

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Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

4

Summary data

f ear f ul s y mmetr y

2009 2010 2011

Quarterly Dec–08 Mar–09 Jun–09 Sep–09 Dec–09 Mar–10 Jun–10 Sep–10 Dec–10 Mar–11 Jun–11

Agriculture etc %yr –3.3 1.2 1.8 1.2 –1.6 1.1 2.4 5.4 9.9 7.5 3.9

Non–agriculture %yr 5.8 5.9 6.3 8.6 7.3 9.4 8.8 8.9 8.3 7.8 7.7

Manufacturing %yr 2.6 1.3 4.3 6.1 11.4 15.2 10.6 10.0 6.0 5.5 7.2

Utilities %yr 5.0 5.1 6.3 7.5 4.5 7.3 5.5 2.8 6.4 7.8 7.9

Construction %yr 0.7 5.3 5.4 5.1 8.3 9.2 7.7 6.7 9.7 8.2 1.2

Commerce & logistics %yr 5.4 5.8 3.7 8.2 10.8 13.7 12.1 10.9 8.6 9.3 12.8

Finance & commercial services %yr 12.3 14.3 11.5 10.9 8.5 6.3 9.8 10.0 10.8 9.0 9.1

Other services %yr 23.6 8.9 13.0 19.4 7.6 8.3 8.2 7.9 5.1 7.0 5.6

Real GDP# %yr 5.8 5.9 6.3 8.6 7.3 9.4 8.8 8.9 8.3 7.8 7.7

Nominal GDP %yr 14.8 10.7 10.3 13.0 16.8 23.3 21.3 19.2 19.0 17.2 16.7

Implicit deflator %yr 9.0 4.8 4.1 4.3 9.4 13.9 12.4 10.3 10.6 9.5 9.0Dec–08 Mar–09 Jun–09 Sep–09 Dec–09 Mar–10 Jun–10 Sep–10 Dec–10 Mar–11 Jun–11

Private consumption %yr 6.7 6.6 6.6 8.5 7.0 6.6 9.5 8.9 8.6 8.0 6.3

Public consumption %yr 50.9 –2.8 21.3 37.5 9.6 6.2 6.7 6.4 1.9 4.9 2.1

Gross fixed capital formation %yr –2.0 –0.6 1.0 0.3 8.7 19.2 11.1 11.9 7.8 0.4 7.9

Exports %yr 8.8 –4.7 –11.8 –14.2 –4.9 10.6 9.8 10.7 24.8 25.0 24.3

Imports %yr 24.7 –6.9 –8.3 –16.1 0.6 21.1 15.2 11.6 0.4 10.3 23.6

Dec–08 Mar–09 Jun–09 Sep–09 Dec–09 Mar–10 Jun–10 Sep–10 Dec–10 Mar–11 Jun–11

Shares of GDP*Private consumption % 61.7 55.4 61.5 60.2 60.5 52.4 61.7 60.1 60.1 52.6 60.5

Investment^ % 34.5 35.8 36.4 37.6 36.4 39.8 37.4 38.7 36.0 37.8 37.8

Gross implied savings % 30.3 35.6 34.9 34.5 32.9 36.4 34.1 34.1 33.7 36.6 34.5

Exports % 22.0 20.2 21.1 20.8 19.2 19.9 21.2 21.1 21.9 23.1 24.3

Imports % 30.4 24.5 27.4 28.1 28.0 26.4 28.9 28.7 25.7 27.0 33.0

Dec–08 Mar–09 Jun–09 Sep–09 Dec–09 Mar–10 Jun–10 Sep–10 Dec–10 Mar–11 Jun–11

Central fiscal situationRevenue growth %yr 10.4 –0.3 –5.3 –8.3 –1.5 6.0 32.2 34.6 38.7 38.7 –2.2

Expenditure growth %yr 24.0 24.0 30.0 32.2 19.0 15.9 17.3 13.2 11.0 17.0 13.9

Central revenue deficit % GDP 3.6 4.8 5.3 6.1 5.7 5.5 3.8 3.7 2.9 3.4 4.9

Central government debt % GDP 51.9 53.8 53.6 55.5 55.1 52.0 51.5 50.5 49.7 48.8 49.1

Dec–08 Mar–09 Jun–09 Sep–09 Dec–09 Mar–10 Jun–10 Sep–10 Dec–10 Mar–11 Jun–11

Balance of paymentsCurrent account USDbn –11.9 –0.4 –4.2 –9.2 –12.2 –12.8 –12.1 –16.8 –10.0 –5.4 –14.2

Merchandise balance USDbn –35.0 –20.2 –26.3 –29.6 –30.9 –31.6 –31.9 –37.3 –31.5 –29.9 –35.5

Invisibles balance USDbn 23.1 19.8 22.1 20.4 18.7 18.8 19.8 20.5 21.5 24.5 21.3

Direct investment balance USDbn 0.7 4.3 4.8 7.5 3.0 3.4 2.9 3.0 0.6 0.6 7.2Portfolio investment balance USDbn –5.8 –2.7 8.3 9.7 5.7 8.8 4.6 19.2 6.3 0.2 2.5

Net loans USDbn 0.4 –0.8 –1.4 3.1 5.7 5.9 9.0 6.6 6.3 5.9 6.4

Overall balance USDbn –17.9 0.3 0.1 9.4 1.8 2.1 3.7 3.3 4.0 2.0 5.4

Current account % GDP –4.2 –0.1 –1.5 –3.1 –3.5 –3.4 –3.3 –4.6 –2.3 –1.2 –3.3

2009 2010 2011

Mar–09 Jun–09 Sep–09 Dec–09 Mar–10 Jun–10 Sep–10 Dec–10 Mar–11 Jun–11 Sep–11

Corporate sector (net balances)RBI survey business conditions 21.1 11.2 24.2 39.8 44.9 41.2 41.5 47.5 50.1 41.4 39.8

RBI survey financial conditions 16.4 8.4 20.0 33.5 39.3 36.3 34.1 39.6 41.1 33.4 30.6

RBI survey capacity utilisation – level –7.4 –20.8 –12.1 –3.8 1.3 1.6 5.8 7.2 9.5 4.4 25.0

RBI survey profit margins –12.9 –18.6 –13.4 –2.8 1.1 3.2 3.1 9.2 8.3 3.8 2.5

Dun & Bradstreet optimism index 95.7 93.8 132.1 143.2 137.3 142.8 150.0 163.5 171.2 183.3 143.6

Sources: CEIC, Westpac Economics, government agencies. # Production basis at factor cost. * Expenditure basis at market prices. ̂ Includes inventories & valuables.