beyondbrics

Might things finally be getting better for the Indian economy, which had a terrible 2011?

Food inflation, which had been declining since mid-November, fell into negative territory in the week ending December 24, down to -3.36 per cent from 0.42 per cent the week prior, driven by steep falls in the price of vegetables, potatoes and onions, according to data released on Thursday.

Economists told beyondbrics that the good food inflation numbers, coupled with improved PMI figures released Monday showed that India was turning a corner, but that the economy still had a long road ahead of it given global headwinds and the many domestic indicators stacked up against Asia’s third-largest economy.

The list of recent negative macroeconomic indicators is long, comprehensive, and makes uncomfortable reading:

• Headline inflation has hovered near double digits.
• The Bombay Stock Exchange was the worst performing of all emerging market exchanges.
• Foreign inflows have dried up.
• The rupee was Asia’s worst-performing currency in 2011.
• GDP growth forecasts have come tumbling down.
• Current account and fiscal deficits have swelled.
• Industrial production has contracted.

“The [food inflation] number is encouraging and it shows that as far as the December headline number is concerned we will see it fall sharply [from 9.11 per cent in November],” said Anubhuti Sahay, economist at Standard Chartered.  “We’re expecting it to come down closer to 7.5 per cent for December.”

“It’s true that crops have been good and prices have actually started coming off but the sharp correction we have seen is primarily driven by the base effect,” she added.

Still, Sahay said the downward trend would continue – despite an acceleration in fuel inflation to 14.6 per cent from 14.37 per cent – and by March or April inflation should sit comfortably within the 6.5-7 per cent range that will likely cause the hawkish Reserve Bank of India to begin cutting rates.

Subir Gokarn, deputy governor of the Reserve Bank of India – which has raised interest rates 13 times since March 2010 – said on Thursday that things are getting better, indicating that interest rates had reached their peak, but, “that does not necessarily say that a quick reversal is in order because inflation risks are still visible, still high,” according to Bloomberg.

And according to Reuters, Gokarn seemed fairly upbeat:

Gokarn, who handles monetary policy, said the rupee appears to be stabilising as its real effective exchange rate (REER) moves towards neutral.

“Momentum indicators suggest that over the last few months, the momentum of inflation is easing a bit,” Gokarn told a conference in Singapore.

India’s balance of payments should also improve, putting less pressure on the rupee, he added.

Still, for the time being the rupee remains weak, and in a research note on Thursday, Macquarie raised concerns about India’s total external debt outstanding more than doubling to $327bn (18.1 per cent of GDP) from $152bn recorded five years ago.

The note continued:

We believe that as residual short-term debt outstanding under external commercial borrowing and under original maturity continues to mature; refinancing will be difficult in an environment of global deleveraging, adding on to the overall BoP stress. While India has comfortable foreign exchange reserves of about US$301 billion currently, these reserves provided a cover of only 95% on the external debt as of Sept-11, down from 138% as of Mar-08.

As Sahay put it: “It will take some more time before we can see some good news in India – we will see a lot more bad news before see something [significantly] positive.”

Related reading:
India: rates paused, peak likely reached, beyondbrics
India: Delhicately poised, FT
India signals halt to monetary tightening, FT