Indian economy continues despite weaker monsoons and inflationary pressures

Wednesday, October 21, 2009 | Posted by: Grant Summers
Categories: | Tags: India, economy, India Watch, South Asia Group, GDP, South Asia, economic, Capital Markets, Indian Economy, FTSE, monsoon

The third quarter of 2009, often the quietest quarter of the year due to summer vacations, saw continued growth across both developed and emerging markets.

Boosted by the rise in commodity prices (Gold reaching its highest price since March 2008 and the gradually recovery of Oil prices), both the FTSE 100 (18%) and the Dow Jones (15%) continued their growth in the period.

Further to this, some of the most significant growth across global indices was seen on India’s Bombay Stock Exchange Sensex Index which rose a further 18% over the quarter, continuing from the 36% growth witnessed in the second quarter of the year.

The sustained development and growth of Indian companies not only encouraged other exchanges across India but also the London Stock Exchange’s AIM market. While the AIM market itself rose 21% over the quarter (64% since the start of the year), Grant Thornton’s India Watch Price Index, which consists of 26 Indian companies listed on AIM and 4 Indian companies listed in the Main market, saw growth of over 35%. With investor sentiment seemingly on the rise, confidence in AIM IPO’s also began to shine through with the successful floatation of Indian Energy Limited in early September.

While this growth in the equity markets is likely to continue, at least in the short term, there are ongoing concerns throughout India with regards to this year’s poor monsoon rainfall. According to the Economist Intelligence Unit (EIU), analysts are now expecting overall rainfall for the season to be 20-25% below the long-term average. These concerns are already beginning to hamper India’s growth prospects with the poor rainfall leading to lower agricultural output across India which, in turn, is beginning to drive food prices up across the country.

However, even with the above in mind, with the resurgence in commodity prices along with the stimulatory fiscal policies and interest rate reductions implemented by the Indian Government earlier in the year, economic data from the EIU shows that India’s GDP is still on track to grow at over 5% in 2009/10. Many other economists are sticking to their growth forecasts for the fiscal year on the belief that inflationary pressure will subside and strong domestic demand will counter the poor agricultural performance. Nevertheless, it must be highlighted that the downward effect of the poor rainfall on the Indian economy is inevitable, and the question remains - to what extent?

On a separate note, according to the reports from the EIU, Indian industrial production rose by 6.8% year on year to the end of July, a marked improvement on the average increase of just 1% year on year in the first quarter of the year. This rise in industrial production has been driven mainly by the broad improvement in domestic consumer and business demand, particularly since mid-year, although there has been recent concern with regards to domestic demand. There was also further growth in India’s manufacturing, mining and electrical sectors.

The start of the quarter also saw the announcement of India’s 09/10 budget which was received with a positive, yet slightly mixed, reaction. Fundamental issues such as infrastructure, health and education were the main focuses of the budget report, with greater funds being allocated to these areas. However, there was concern from economists with regards to the government’s reluctance to address measures to help implement these large governmental projects.

Even with India’s growing budget deficit, the government had increased total expenditure for the year by around 36%, and as highlighted in last quarters India Watch economic report, India should not overly concern itself with its budget deficit level, as further spending in infrastructure and development are essential if India’s growth is to get back to the levels seen pre 2008.

Further to the growth levels seen in other areas of the Indian economy, the end of the quarter also saw the strengthening of the Rupee against the Dollar. The Rupee is currently hovering around the 48-mark and is expected to venture higher, taking heed from the recent resurgence in the Indian economy and equity markets. Further reports highlighted the effect of increased overseas fund inflows on the value of the Rupee, as these funds looked to increase their holding in Indian assets in order to benefit from the recent economic growth, growth which hit a level of 6.1% in the three months to June, according to a report from Bloomberg.

Despite the recent increase in growth levels across the world’s major economies over the last 2 quarters of the year, economists are continuing to highlight the uncertainty of the global economic climate. Confidence in the market remains at an extremely volatile level and IPO’s remain few and far between.
In summary, while global equity markets have begun to find their feet over the last 4 months, the rest of the world’s economic growth continues to be hampered by the widespread insecurity. In contrast, India’s equity markets have seen a significant rise and the economic growth continues at 5% plus, albeit with concerns arising from the weak monsoons.

Alex Wright
Executive, Capital Markets, South Asia Group
Grant Thornton UK LLP