fearful symmetry

March 2012

a monthly chronicle of the Indian economy

Welcome to Westpacs monthly chronicle of the Indian economy, as seen through the penetrating gaze of fearful symmetry. Last year fearful symmetry spent the early part of March in and
around Delhi soaking up the atmosphere of Budget week. This year fearful symmetry was nowhere near the Lok Sobha, preferring to watch from afar as Finance Minister Pranab Mukherjee unveiled a document that has been variously described as workmanlike, realistic and credible in the sensible press. If you are wondering what the entertaining but shrill majority of the Indian press corps said about the Budget, youve come to the wrong place.
25 20 15

The general government fiscal position

%yr/%GDP %yr/%GDP
Gross State deficit %GDP Central deficit %GDP Central revenue growth Central spending growth

25 20 15

Sources: CEIC, Westpac Economics.

10 5 0 1980 1985 1990 1995 2000 2005 2010

10 5 0

Quickly reviewing the key numbers, the fiscal deficit outcome for
11/12 is expected to come in at 5.9% of GDP, a deterioration from 10/11. The forward estimates anticipate a modest improvement to 5.1% of GDP in 12/13, the first of three years of consolidation. The deficit is expected to decline to 3.9% of GDP by March 2015 - a 2ppt improvement that, in tandem with favourable debt dynamics away from the flow position, will reduce outstanding liabilities by 3.8% of GDP over that period, to an end point of 41.9%. The consolidation relies on a compression of non-plan expenditures, especially subsidies, a recovery in growth, a rise in the revenue elasticity of activity, the expiration of some revenue-negative crisis measures (notably in excise rates), an increase in the rate and base for the services tax, plus an increase in vice duties and some tinkering with luxury duties. The revenue-positive measures are partially offset by a range of indirect tax concessions targeted at priority areas such as agriculture, infrastructure, health and mining, and some pro-savings/ investment direct taxation policies. Importantly, capital outlays and Plan spending will continue to rise strongly through the estimate period. In sum fearful symmetry argues that the government has made a number of important gestures - medium term consolidation, highlighting the unsustainable nature of the subsidy regime, attempting to channel resources towards investment and saving, broadening the tax base - without taking any single landmark decision that would set this document apart as a game changer.

Central government expenditure growth

40 30 20 10 0
Sources: CEIC, Westpac Economics. Rolling twelve months for historical data, budget estimates for Mar-12 and Mar-13.

%yr
Total Plan Non-plan

%yr

40 30 20 10 0 -10

-10 Jan-00

Jan-03

Jan-06

Jan-09

Jan-12

The subsidy bill

3.0 2.5 2.0 1.5 1.0 0.5 0.6 0.0 2005/06 2006/07 2008/09 2009/10 2010/11 2011/12 2012/13 0.7 0.7 0.8 1.0 0.9 0.9 % GDP Other Interest Fuel Fertiliser Food 1.4 % GDP
Source: Finance Ministry

3.0 2.5

As for the credibility of the projections, fearful symmetry gives the

government a pass mark here, noting (along with the bulk of the analyst community) an increased realism vis-a-vis prior documents, (despite a difference of opinion on the macroeconomic assumptions that underpin the Budget, see below). The main exception in the credibility stakes is the fuel subsidy bill, which is budgeted to decline by 36% on the current years outlay. That will require both tough political decisions on domestic pricing (most see Congress willingness and ability to act decisively as severely constrained) and a lower average oil price than seems likely in this fractious world. That said, fearful symmetry was much taken by this snippet of wisdom from a highly respected senior mandarin responding to a question on the credibility of the fuel subsidy estimates: The assumption is that the difference between global prices and the domestic price will be narrowed. If you subject the government to scepticism on the ground that there is no way any sensible policies can be passed with a consensus, then not just the Budget but everything else also falls. That is the fundamentally correct answer
Westpac Institutional Banking Group Economic Research

0.2 1.0

0.5

0.8 0.5

2.0 1.5

0.9

0.8

0.7

1.0 0.5 0.0

0.7

0.8

of course, but such sentiments may precipitate on infertile soil in the harsh strobe light of political pragmatism.

fearful symmetry remains of the view that official activity forecasts

remain slanted towards optimism, a position dating back to the middle of last year. For FY2012-13, the Finance Ministrys real GDP growth estimate is 7.6%, (+/ %) the same central tendency as
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fearful symmetry
a monthly chronicle of the Indian economy
that of the Prime Ministers advisory council, which was released in February. The RBIs forthcoming annual statement (due April 17) will put another official estimate in the public domain. The average forecast in the consensus survey is 7.2%, with just a single observation (out of 15) as strong as the official figures. fearful symmetry expects 6%. Of course, the figure that matters for the fiscal aggregates is nominal GDP. The Finance Ministry has assumed 14% in 2012/13, 15.0% in 13/14 and 15.5% in 14/15, with the latter two figures reflecting the aspirational 9% real growth target aimed at across the five year plan period and 6-6% growth in the economy-wide price level. That is, the government is hoping to move into the high growth, managable inflation sweet spot that it covets. (Even in aspirational government documents, low inflation is too much to pray for in a supply constrained, demand rich system).

India: real growth and the price level

12 11 10 9 8 7 6 5 4 3 2 2 3 4 5 6 7 8 9 Real GDP 10 11 12
Official 12/13

GDP IPD
Sources: Westpac Economics, CEIC.

Official 13/14, 14/15 average

Westpac 12/13

sweet spot

The economy has tantalisingly circled the sweet spot a couple of

times over the last decade but it never managed to pitch a tent there. Mukherjees forecasts argue that he will get back there in two years. In terms of debt dynamics, he has a very considerable margin of error before any slowdown induced problems would arise. Outside of the early part of the 2000s, Indias combination of high nominal growth and financial repression (mainly via the compulsory 24% SLR requirement that must be met with government securities) has kept an extremely comfortable buffer between debt servicing costs and the change in the denominator of the debt/GDP ratio. Even using fearful symmetrys more cautious view on activity going forward, there seems little risk that Indias debt dynamics will come under any stress at all from this key relativity.
24 20 16 12 8 4 0 -4

Nominal growth rate less debt servicing costs

%GDP
Sources: CEIC, Finance Ministry Westpac Economics.

%GDP
High growth plus financial repression equals an artificially manageable debt position

24 20

Differential Nominal 10yr yield Nominal GDP

Westpac forecasts

16 12 8 4 0 -4

2000

2003

2006

2009

2012

2015

The Finance Ministrys Budget Highlights document contained this

little gem of a bullet point: Proposal to lay a White Paper on Black Money. To fearful symmetry Indias black money question is so deep and deadly a tar pit that no established politician would ever dip their toe into it, for fear of whose crisp linen might be besmirched upon its withdrawal. The White Paper angle is thus a politically astute approach - but in terms of tackling the problem it is likely to prove to be one step removed from masterly inactivity. Its compilation will take time, allowing even the most egregious offenders to re-arrange their affairs, shifting funds out of traditional but suddenly less opaque destinations into one of the many locales looking to step into the breach created by the erosion of S-------- competitive advantage.
4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0

The fiscal impulse

%GDP %GDP 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0

Sources: CEIC, Westpac Economics.

Back to more immediate matters, and the RBI left the rate corridor
unchanged at their mid-quarter policy review, which was announced the day before the Budget. The Bank did however slash the CRR by 75bps on the previous Friday in a surprise inter-meeting strike. fearful symmetry argued in this chronicle a month ago that the RBI would wait to assess the degree of commitment to medium term fiscal consolidation before cutting interest rates. That wasnt a courageous forecast. When one reads that ... the slippage in the fiscal deficit has been adding to inflationary pressures. Credible fiscal consolidation, therefore, will be an important factor in shaping the inflation outlook and However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions you dont need to have topped the CSE to be able join the dots for the short term. Now that the government has delivered a credible looking roadmap, both in the aggregate and in its composition (keeping up the momentum regards the Plan while rationalising subsidies, at least at paper) fearful symmetry feels it will be difficult for the RBI to protest about inflation any longer, allowing for a reversal of the excessive late cycle hikes that got fearful symmetrys dander up last year.

1980

1985

1990

1995

2000

2005

2010

Indian monetary policy: history and forecast

20 18 16 14 12 10 8 6 4 2 0 Mar-04
Sources: CEIC, Westpac Economics.

%pa

%pa
Rate corridor Call rate CRR

20 18 16 14 12 10 8 6 4 2 0

Mar-06

Mar-08

Mar-10

Mar-12

Obligatory Chinese comparison stat: Indias defence budget has

increased by an average of 13.1%pa since 1996. Chinas? 15.3%.

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 are reasonable, 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.

fearful symmetry
Summary data
2011 Monthly Industrial production, of which Manufacturing Electricity Basic goods Capital goods Intermediate goods Consumer durables Manufacturing PMI (index) New orders to inventories (ratio) Services PMI (index) Composite PMI employment (index) Motor vehicle sales total %yr Two wheelers Passenger cars New cellular phone subscription mn units Domestic credit %yr Commercial Commercial nonfood Resident deposits %yr Wholesale bank financing (% res. deposits) External commercial finance* USDbn Exports %yr Imports %yr Nonoil imports %yr Trade balance USDbn Foreign direct investment USDbn Foreign portfolio investment USDbn Net foreign official assets USDbn Wholesale price index %yr Primary articles food %yr Primary articles nonfood incl. energy %yr Manufactured products excl. food %yr %3th annualised %6th annualised Policy repo rate %pa Policy reverse repo rate %pa Call money (weighted avg) %pa Cash reserve ratio % 3mth Treasury bill %pa 12mth Treasury bill %pa INR per USD Nominal effective exchange rate index^ Real effective exchange rate index^ Bombay Sensex 30 NIFTY 50 Foreign instit. investment net debt INRbn Foreign instit. investment net equity INRbn Apr 5.3 5.7 6.5 7.2 6.6 3.9 1.6 58.0 1.23 55.1 51.8 23.9 27.3 13.0 11.1 Apr 17.9 21.8 22.6 18.1 2.51 2.1 Apr 25.1 16.0 6.8 -14.7 3.1 3.5 302 Apr 9.7 10.7 26.9 7.0 14.8 12.6 Apr 6.75 5.75 6.33 6.00 7.52 7.76 44.4 97.6 102.8 19,136 5,750 -0.2 72 May 6.2 6.3 10.3 7.5 6.2 0.1 5.1 57.5 1.22 53.0 51.6 15.6 16.5 6.2 9.5 May 17.9 21.4 22.3 17.6 2.60 2.7 May 54.5 52.0 51.4 -19.5 4.7 -1.6 301 May 9.6 8.3 21.4 7.2 10.4 12.6 May 7.25 6.25 7.33 6.00 8.14 8.29 44.9 96.2 101.1 18,503 5,560 23 -66 Jun 9.5 11.2 7.9 7.8 38.7 1.6 1.6 55.3 1.19 54.0 51.5 14.6 15.5 5.5 8.6 Jun 19.2 21.3 20.3 18.4 2.71 3.3 Jun 25.6 36.3 23.7 -14.1 5.7 0.8 304 Jun 9.5 7.6 18.4 7.7 5.9 11.7 Jun 7.50 6.50 7.39 6.00 8.19 8.29 44.9 96.2 101.7 18,846 5,647 3 46 Jul 3.7 3.1 13.1 10.0 -13.7 -0.1 9.0 53.6 1.06 55.3 50.2 12.4 14.7 -5.7 7.6 Jul 18.2 19.2 18.4 17.5 2.81 4.2 Jul 65.9 38.0 31.4 -14.2 1.1 1.6 310 Jul 9.4 8.2 15.8 7.6 2.3 8.3 Jul 8.00 7.00 7.90 6.00 8.39 8.49 44.4 97.0 103.3 18,197 5,482 26 80 Aug 3.4 3.9 9.5 5.8 4.0 -1.0 5.5 52.6 1.08 52.9 49.3 15.0 18.3 -1.7 5.3 Aug 18.5 19.7 20.2 18.1 2.99 3.7 Aug 46.2 45.6 35.5 -14.9 2.8 -1.8 316 Aug 9.8 9.6 18.2 7.7 1.8 6.0 Aug 8.00 7.00 8.02 6.00 8.39 8.31 45.3 94.8 100.9 16,677 5,001 29 -108 Sep 2.5 3.1 9.0 5.3 -6.5 -1.4 8.9 50.4 1.02 50.5 48.9 21.9 26.5 0.8 6.5 Sep 18.4 19.5 19.3 17.4 3.16 2.4 Sep 29.9 18.7 24.1 -11.4 1.8 -1.1 316 Sep 10.0 9.6 14.6 7.8 2.1 4.0 Sep 8.25 7.25 8.28 6.00 8.44 8.46 47.6 92.2 98.5 16,454 4,943 -17 -2 Oct -5.0 -6.0 5.6 1.2 -26.5 -8.4 -0.4 52.0 1.08 49.9 48.9 0.8 3.5 -19.0 7.1 Oct 17.3 18.8 18.9 15.2 3.12 2.5 Oct 24.9 25.8 22.6 -18.4 1.2 -0.4 316 Oct 9.9 10.2 7.4 7.9 4.6 3.4 Oct 8.50 7.50 8.53 6.00 8.65 8.68 49.3 89.9 96.2 17,705 5,327 14 17 Nov 5.9 6.6 14.6 6.4 -4.3 0.2 11.5 51.0 1.05 51.5 49.4 24.2 27.0 11.5 6.7 Nov 17.2 17.6 17.4 16.4 3.01 1.6 Nov 3.9 24.5 21.7 -13.6 2.5 0.1 304 Nov 9.5 8.3 3.4 8.2 6.0 3.9 Nov 8.50 7.50 8.56 6.00 8.81 8.45 50.8 87.6 93.9 16,123 4,832 9 -42 Dec 2.5 2.6 9.1 5.3 -16.3 -2.0 4.9 54.2 1.14 53.0 50.5 9.4 9.7 6.1 7.6 Dec 16.2 15.9 15.7 16.8 2.74 4.5 Dec 6.7 19.8 23.4 -12.7 1.4 2.3 293 Dec 7.7 0.8 1.8 7.7 5.7 3.9 Dec 8.50 7.50 8.86 6.00 8.48 8.35 52.7 85.7 91.7 15,455 4,624 218 1 2012 Jan 6.8 8.5 3.2 1.6 -1.5 -3.2 -6.8 57.5 1.19 54.4 50.3 13.5 14.1 12.9 8.4 Jan 14.8 15.1 16.1 15.7 3.22 2.7 Jan 10.1 20.3 17.6 -14.8 2.0 5.4 280 Jan 6.6 -0.5 0.6 6.4 4.6 4.6 Jan 8.50 7.50 8.80 5.50 8.73 8.47 51.3 88.1 94.7 17,194 5,199 160 104 Feb 56.6 1.21 54.1 49.5 11.2 11.9 6.8 Feb Feb -4.2 22.8 -15.2 Feb 7.0 6.1 -2.6 5.4 3.7 4.8 Feb 8.50 7.50 8.78 4.75 9.06 8.51 49.2 90.2 96.8 17,753 5,385 100 252

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

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 are reasonable, 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.

fearful symmetry
Summary data
2009 Quarterly Agriculture etc %yr Nonagriculture %yr Manufacturing %yr Utilities %yr Construction %yr Commerce & logistics %yr Finance & commercial services %yr Other services %yr Real GDP# %yr Nominal GDP %yr Implicit deflator %yr Private consumption %yr Public consumption %yr Gross fixed capital formation %yr Exports %yr Imports %yr Shares of GDP* Private consumption % Investment^ % Gross implied savings % Exports % Imports % Central fiscal situation Revenue growth %yr Expenditure growth %yr Central revenue deficit % GDP Central government debt % GDP Balance of payments Current account USDbn Merchandise balance USDbn Invisibles balance USDbn Direct investment balance USDbn Portfolio investment balance USDbn Net loans USDbn Overall balance USDbn Current account % GDP Jun09 1.6 8.5 5.4 5.9 4.4 8.4 11.2 13.0 7.5 10.3 2.9 Jun09 6.6 2.8 0.6 4.7 6.9 Jun09 62.1 37.4 35.9 21.4 27.6 Jun09 -5.3 30.0 5.3 53.6 Jun09 0.4 20.2 19.8 4.3 2.7 0.8 0.3 0.1 2009 Sep09 24.2 20.0 12.1 13.4 132.1 Sep09 2.5 10.9 8.9 7.0 5.8 10.3 10.6 19.3 9.8 12.9 3.1 Sep09 6.6 21.3 1.0 11.8 8.3 Sep09 61.8 39.9 36.7 20.5 28.3 Sep09 -8.3 32.2 6.1 55.5 Sep09 4.2 26.3 22.1 4.8 8.3 1.4 0.1 1.5 Dec09 39.8 33.5 3.8 2.8 143.2 Dec09 -1.4 9.4 11.3 4.0 9.2 10.6 8.3 8.0 7.4 15.7 8.3 Dec09 7.9 37.5 1.5 14.1 16.0 Dec09 61.8 36.7 33.2 20.1 28.6 Dec09 -1.5 19.0 5.7 55.2 Dec09 9.2 29.6 20.4 7.5 9.7 3.1 9.4 3.1 2010 Mar10 44.9 39.3 1.3 1.1 137.3 2010 Mar10 1.1 10.9 15.2 7.3 9.2 13.7 6.3 8.3 9.4 23.3 13.9 Mar10 7.0 9.6 8.7 4.9 0.6 Mar10 52.4 39.8 36.4 19.9 26.4 Mar10 6.0 15.9 5.5 52.2 Mar10 12.2 30.9 18.7 2.8 5.7 5.7 1.8 3.5 Jun10 41.2 36.3 1.6 3.2 142.8 Jun10 3.1 9.4 9.1 2.9 8.4 12.7 10.0 4.4 8.5 19.1 10.6 Jun10 6.6 6.2 19.2 10.6 21.1 Jun10 62.0 38.6 35.0 21.6 29.6 Jun10 32.2 17.3 3.8 51.9 Jun10 12.6 31.4 18.8 2.8 8.8 5.0 2.1 3.4 Sep10 41.5 34.1 5.8 3.1 150.0 Sep10 4.9 8.0 6.1 0.3 6.0 10.8 10.4 4.5 7.6 16.5 8.9 Sep10 9.5 6.7 11.1 9.8 15.2 Sep10 61.7 40.4 35.6 22.0 29.9 Sep10 34.6 13.2 3.8 51.2 Sep10 12.7 31.9 19.2 3.5 4.6 9.0 3.7 3.5 Dec10 47.5 39.6 7.2 9.2 163.5 Dec10 11.0 7.7 7.8 3.8 8.7 9.8 11.2 -0.8 8.3 16.9 8.6 Dec10 9.0 6.4 10.3 10.5 11.4 Dec10 60.4 38.1 35.7 23.4 29.7 Dec10 38.7 11.0 3.0 50.6 Dec10 16.9 37.0 20.1 3.6 19.2 6.6 3.3 4.7 2011 Mar11 50.1 41.1 9.5 8.3 171.2 2011 Mar11 7.5 7.8 5.5 7.8 8.2 9.3 9.0 7.0 7.8 17.2 9.5 Mar11 8.6 1.9 7.8 24.8 0.4 Mar11 52.6 37.8 36.3 23.1 27.0 Mar11 38.7 17.0 3.4 49.6 Mar11 10.0 31.5 21.5 1.2 6.3 6.4 4.0 2.3 Jun11 41.4 33.4 4.4 3.8 183.3 Jun11 3.9 8.4 7.2 7.2 1.2 12.7 9.0 5.6 7.7 16.8 9.0 Jun11 8.0 4.9 0.4 25.0 10.3 Jun11 60.5 37.8 34.0 24.5 32.9 Jun11 -2.2 13.9 4.9 49.9 Jun11 6.4 30.2 23.8 1.1 0.2 6.4 2.0 1.4 Sep11 39.8 30.6 4.3 2.5 143.6 Sep11 3.2 7.3 2.7 9.8 4.3 9.8 10.5 6.6 6.9 16.1 9.2 Sep11 6.3 2.1 7.9 24.3 23.6 Sep11 59.5 36.8 32.8 25.4 30.0 Sep11 -3.4 13.1 5.1 50.0 Sep11 15.9 41.8 25.9 7.9 2.5 7.0 5.4 3.3 Dec11 35.2 26.3 0.3 -1.6 143.7 Dec11 2.7 6.8 0.4 9.0 7.2 9.2 9.0 7.9 6.1 14.2 8.1 Dec11 5.9 4.0 0.6 27.4 10.9 Dec11 60.4 35.6 na 24.9 32.7 Dec11 -7.7 18.5 5.2 Dec11 Mar11 33.6 25.2 0.9 -2.9 156.2

Corporate sector (net balances) RBI survey business conditions RBI survey financial conditions RBI survey capacity utilisation level RBI survey profit margins Dun & Bradstreet optimism index

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

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 are reasonable, 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.