INDIA GROWTH IS ABOUT TO START

Economic conditions are not as bad as they seem. The future, in fact, is looking brighter than before.
Two things going for the economy at present are the peaking of interest rates and inflation. The Reserve Bank of India (RBI) can pause its rate hiking spree on the back of the topping out of inflation. Equity and debt markets can then give up their bearishness and look ahead into a period of stable inflation with interest rates coming off.
Inflation for June 2011 printed at 9.44 percent, against consensus estimates of 9.65 percent. Inflation was higher by 0.8 percent from the previous month, but the non-food manufacturing index rose by just 0.2 percent month-on-month (ie, June compared to May) and 7.23 percent year-on-year (June 2011 vs June 2010).
The weakness in the IIP (Index of Industrial Production) is seen as a precursor to non-food manufacturing inflation coming off down the line. The IIP growth numbers for May 2011 came in weaker than expected at 5.6 percent against consensus estimates of over 8 percent. The IIP contracted by 3.1 percent month-on-month. This is the second straight month-on-month contraction in IIP. In April, the IIP had contracted by 1.6 percent month-on-month.
Inflation for the month of July is also likely to print at over 9.5 percent levels as the fuel price hikes announced by the government in June will be reflected in the July numbers – especially the spread on effects of transporters and others raising prices. If commodity prices, especially crude oil, stay steady, inflation will start trending down from August onwards. In this scenario, the RBI can hold on to policy rates.

Commercial vehicle sales, seen as a barometer of economic growth, registered 17.7%growth for June 2011. Growing commercial vehicle sales in a period of high inflation and high interest rates is promising. Reuters

There are signs of interest rates coming off. Banking system liquidity has eased with bank borrowings from the RBI coming off by over Rs 50,000 crore. Government spending, bond maturities, rising deposit growth and drop in currency in circulation have all contributed to the rise in liquidity. The easing liquidity situation has brought down borrowing costs for banks and corporates with yields on one-year and five-year corporate debt paper falling by around 40 basis points (100 basis points make 1 percent) from peaks seen in May.
On the economy front, exports have shown good performance for June 2011. They have grown by 46.4 percent year-on-year for June 2011. Exports at $29.2 billion have grown by over 12 percent month-on-month. Export growth is promising despite signs of a weakening global economy.
Commercial vehicle sales, seen as a barometer of economic growth, registered 17.7 percent growth for June 2011. Growing commercial vehicle sales in a period of high inflation and high interest rates is promising.
Direct tax collections were higher by close to 24 percent year-on-year in the first quarter of 2011-12. The higher direct tax collection is an indication that corporate profitability is still not threatened. On the whole, the Indian economy, while showing signs of weakening, is looking resilient despite global economic issues of US unemployment, Chinese inflation and eurozone debt.

At first glance Economics and Physics have little in common. Physics is a natural science and a physical hypothesis is verified by controlled experiment.
It’s impossible to run controlled economic experiments.But economics borrows many mathematical tools from physics. One of these is spectrum analysis. Scientists and engineers working with electro-magnetic waves and sound waves need to know the cyclical patterns of those waves. 

Perhaps the Government may, in the coming weeks, push the accelerator pedal on economic reforms as a way to divert the public gaze from the sordid scams. It has, for example, speedily cleared the $ 7.2b. investment by BP, to buy a 30% stake in some of RIL's KG6 gas blocks. RIL says that the technical expertise of BP would enable it to restore production in the gas blocks, which had dipped. This can be expected. It will drive the stock, a heavyweight in the sensex, and thus the market.

The group of secretaries has also cleared allowing more FDI in multi brand retail. Investors would cheer this. Another, brilliant, move by Finance Minister Pranab Mukherjee is to induct BJP's Sushil Modi to head the panel to introduce the GST (goods and services tax), a long overdue and necessary reform that, by simplifying indirect tax structure, is expected to add 1-2% to GDP growth! Similarly, there is talk of allowing power consumers to be permitted to freely switch suppliers of power, similar to mobile number portability in telecom. This would ensure that power companies do not unjustifiably hike power rates, with scant regard to customer service.

There are bills which are pending, e.g. on pension reforms and on framing rules under which insurance companies can be listed; a passage of these would similarly enthuse investors. So would the introduction and passage of a Lokpal Bill, unless it is horribly watered down by the Government. This would be a test of the honesty of Prime Minister Manmohan Singh.

If one cuts down to the bone, the sole sticking point is whether investigating agencies like CBI and CVC should come under the purview and direction of an independent Lokpal, or whether, as now, they should be answerable to politicians in Government. When used as an instrument for meeting political ends, or to protect the well-connected, investigating agencies fail, and get a bad reputation. If brought under an independent authority such as the Lokpal, the agencies can truly investigate, without fear or favour. This is the crux. But it is highly unlikely that politicians will give up this power to direct investiga tions; if only the Prime Minister showed as much backbone in this as he did in the nuclear deal with the US, it may happen. A big IF!

The market is moving in a sideways range. This is because whenever there is a global crisis (and there are several like Greece, perhaps the US if they fail to strike a deal before Aug 2, and others yet to erupt), investors flee stock markets, bringing them crashing down like Humpty Dumpties. Whenever the crisis get resolved, as in the case of the Euro 109 b. bailout for Greece last week, the money flows back in. When it does, markets rally. The sensex rallied on Tuesday, up 146 points; backed by net FII buying of Rs 418 crores even as domestic funds were net sellers of Rs 109 crores. The BSE-Sensex ended the week up 160 points, at 18722, whilst the NSE-Nifty gained 52, to end at 5633.

So if there is a flurry of economic reforms, investors, especially foreign investors, will get enthused and cause a rally. After which the next crisis, which could be Spain, or Italy or perhaps even the US, if hard boiled Republicans and Democrats decide to bang their heads instead of meet their minds, and fail to strike a deal. The Economist has a well argued article on the theory of the inevitable compromise and why it is wrong

One rating agency in the US has already downgraded US from AAA to AA plus, and Greece has been termed in technical default by another.

Yet another policy change, which ought to have come in long ago and may have avoided the telecom scam, is to allow spectrum sharing and trading of spectrum. The whole 2G spectrum controversy has arisen because a certain amount of spectrum has been given at a low rate, for start up operations. The decision to price it low was a correct one, in order to cut the cost of telephony thus ensuring its spread. It has succeeded because there are now over 750 m. mobile phone users. There used to be a time when having a land line telephone was a privilege obtained after a long wait or a friendly connection in Delhi. No longer.

Yet the lower price of spectrum made it possible for successful allottees of it to become squatters. By merely selling the rights to spectrum (or the company that owned it) several persons became rather well off. What if there was no need to sell spectrum, because technology now allows companies to share it?

This is similar to ATM machines in banks or to telecom towers. Initially all banks boasted of a large network of their own ATMs, as a means to attract customers to open accounts with them. Over time they realised the wastage of duplication and began a process of integrating ATMs so that it is now possible for any bank card holder to use any other bank's ATM, on payment of a nominal fee. The same thing happened with telecom towers.

Telecom companies similarly acquire more spectrum than they need, in order to cater to peak traffic. During non peak hours, there is low usage of spectrum, called white spaces. If companies were granted the right to use spectrum (not own it) and were also allowed to trade excess spectrum, the tussle for ownership of spectrum would be obviated. This column has long been advocating exploring the possibility of trading spectrum. This would work like power trading in which a temporary shortage of power in one state can be fulfilled by a temporary excess in another. The Government is only now thinking of allowing spectrum sharing and trading.

The US Government had done this in 1996, when it passed the Telecommunications Act of 1996. Why does it take our Government 15 years to make the same mistakes, instead of studying those others have made before it?

The Government can also take an easy decision to show its commitment to economic reform - announce the privatisation of Air India. There is absolutely no reason why it should need to own an airline. None! Except free travel for VIPs whenever they have the urge to. The airline has too much debt which it can never repay. Yet the Government is thinking of infusing Rs 1200 crores as additional equity into it.

This impacts its competitors. Kingfisher Airline does not get the benefit of equity infusion using taxpayer's money; as a result it is unable to pay its fuel bills and, last week, HPCL refused to supply it fuel. Flights must have been cancelled due to this and passengers inconvenienced. Jet Airways has announced a quarterly loss of Rs 123 crores.

Real GDP in the OECD area grew by 0.5% in the first  quarter  of 2011.  Although  private
consumption remained the main driver of growth in the OECD as a whole, its contribution to growth fell in nearly all major economies. At 0.2 percentage point, private consumption’s contribution to OECD growth fell to its lowest level since the second quarter of 2009. The fall in the contribution from private consumption was offset by a large swing in the contribution from inventories.

After entering a hyper growth face, India’s telecom market seems to be finally cooling off, with subscriber addition numbers showing a sudden drop off in April and May.The net wireless addition for the month of May, the latest for which data is available, was just 13.5 million, down from 15.34 million in the previous month. Compare this the 2009 monthly average addition of around 19 million subscribers.
In fact, the May figure is the lowest monthly addition in India’s telecom history since June 2009 -- two years ago. It may very well go down as the end of an era begun in early 2009 when the first of the 'new operators' entered the market. 2009 and 2010 saw the Indian telecom market catch fire -- ignited by the entry of virile, hungry for growth new GSM operators in each license area.Corporate results were a mixed bag. It is interesting to contrast some bank results. Union Bank showed a 22 per cent dip in net profits for the June quarter, due to higher provisioning for non performing assets. However, Axis Bank showed a 27% increase in net profits due to lower provisioning for NPAs, Yes Banks profits were up 38% for the same reason and Kotak Banks were also up 27%.