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Sunday, May 18, 2008

Economy of India | Indian Economy Developments

A major factor that contributed to the second most-populous nation on the planet achieving this milestone, in April, was the sharp appreciation of the Indian rupee against the U.S. dollar. Whereas Indian currency has been gradually appreciating against the U.S. greenback over the last few years, what took many by surprise was the sudden and sharp appreciation during the months of March and April when the exchange rate came down drastically, from just under Rs 45 to the U.S. dollar to less than Rs 41 to the dollar or a change of roughly 8.5 percent in less than 40 working days.

By way of contrast, the rupee had appreciated by only 2.3 percent vis-a-vis the dollar between Apr. 1, 2006 and Mar. 31, 2007 (the Indian financial year). In this period, the Indian currency gained 2.7 percent against the Japanese yen but depreciated by 6.8 percent against the euro and by 9 percent against the British pound. The appreciation of the rupee has made Indian exports more expensive in markets where transactions are designated in U.S. dollars while making imports relatively inexpensive.

Analysts are of the view that the Reserve Bank of India (RBI), the country's central bank and apex monetary authority, has consciously allowed the rupee to strengthen as part of a package of policies aimed at controlling domestic inflation. In recent months, inflation in India, as measured by the official wholesale price index, had threatened to cross the 7 percent mark and is currently hovering in the region of 6 percent. The Indian economy is currently one of the fastest growing in the world --it has grown by an annual rate of over 9 percent for two successive years and by an average of over 8 percent over the last four years, both for the first time since the country became politically independent 60 years ago.

At the same time, this growth has not been inclusive because it has bypassed large sections of the population and swathes of territory, mainly in the east and the north. One out of four of the 1.1 billion citizens of India live on less than one U.S. dollar a day. "The reason why the RBI is not intervening in the currency markets to depreciate the value of the rupee is because it wishes to cushion the economy from the imported variety of inflation at a time when international prices of crude oil are in the region of 65 dollars a barrel," explains Amitendu Palit, visiting fellow at the Indian Council for Research on International Economic Relations, a New Delhi-based think tank. India currently imports roughly three-fourths of its requirement of crude oil.

Palit told IPS that part of the reason why the rupee has strengthened against the dollar is because the U.S. currency has itself steadily weakened against hard currencies like the yen, the euro and the pound. He said that if the RBI purchased more dollars to keep its price up, it would increase domestic money supply and add to inflationary pressures. Palit is of the view that a strong rupee would have a negative short-term impact on the growth of "price-elastic' exports such as computer software, IT-enabled services (or business process outsourcing), garments and textiles. During financial 2006-07, India's merchandise exports touched 125 billion dollars, implying an annual growth of nearly 23 percent. Imports grew at a faster 25 percent with crude oil accounting for close to one-third of the total value of imports during the year.

Exports have doubled over the last three years. India's share of world trade, however, still remains negligible, growing from 0.76 percent in 2003-04 to over one percent at present. During this period, inflows of foreign direct investment have jumped from 2.2 billion dollars to 16 billion dollars (and this amount excludes retained earnings that have been reinvested). "I expect the rupee to continue to appreciate gradually, not suddenly, over the next year or so and the dollar to go below the level of Rs 40," says Manoj Pant, professor of economics at New Delhi's prestigious Jawaharlal Nehru University. He told IPS in an interview that the government and the RBI wanted to "send a clear message to exporters that they could not expect to continue receiving preferential treatment".

While there is considerable concern among economists that the Indian economy is "over-heating" and that the benefits of economic growth have not been evenly distributed among all sections of the population, others are optimistic about the country's "growth story". A report prepared by Credit Suisse bank pointed out that over a year after their economies crossed the one trillion dollar mark, eight out of ten countries witnessed bullish trends in their stock markets.

The report added that the combined wealth of the estimated 20 million non-resident Indians is currently more than one trillion dollars, which is the gross domestic product of the entire Indian economy. The recent rise in the rate of growth of the Indian economy has been fuelled by a sharp rise in manufacturing output and the services sector. Among the services that have been growing very fast are IT-enabled services and computer software. These are the segments of the economy that are now likely to be adversely impacted by the appreciation of the rupee.

"Companies that were exporting software and IT-enabled services were shocked by the sudden rise in the value of the rupee vis-à-vis the dollar because the bulk of their business was designated in dollars," points out D.K. Joshi, director and principal economist, CRISIL Ltd. (earlier known as Credit Research and Investment Services of India Ltd.). In an interview with IPS, Joshi added that the "profit margins of companies exporting IT services would be squeezed and they would certainly fight back by increasing their billing rates in dollar terms." Even if the rate of growth of computer software and IT services exporting firms slows down, analysts IPS spoke with were reasonably optimistic that the deceleration brought about by the sudden strengthening of the rupee in relation to the dollar would be a passing phenomenon.

India's commerce minister Kamal Nath has set ambitious export targets of 160 billion dollars and 200 billion dollars respectively for the country over the next two years. He told journalists on Apr. 19 that the Indian government had taken into account the likely slowdown in the U.S. economy while setting these targets. India's trade basket, he said, was quite wide, claiming that the expected slowdown in the U.S. economy would not have a major impact on the country's exports.

Crude Price on all time high

Global crude oil prices are on a all time high of US $ 125 per barrel and is adversly effecting the balance sheet of indian economy, probably it is also a reason of depreciating value of indian rupee when compared with US $ .

Crude prices could reach higher levels over the next few months as the winter season in the northern hemisphere gets under way.
Although the price of the basket of crude relevant for India is ruling at a much lower level than $55, the effect of higher crude prices is bound to affect the profitability of a swathe of companies, especially in the manufacturing sector, as costs of energy, fuel and transportation could start to spiral.

Even if the Government decides to limit the price increases by seeking recourse to further cuts in excise and customs duties, and requiring oil companies to bear an even greater part of the burden, profitability and growth rates could be affected as growth rate of the global and the Indian economy slows down. Market sentiment could also be influenced in a negative manner if liquidity in global markets dries up and a flight to safe assets and safer currencies set in.
Investors as such should consider adopting a cautious approach to buying equities, by staggering investments over a period of time, and partial profit booking on deep-in-the-money positions, may be appropriate. This could mitigate any downside risk that could envelop the markets due to the bullish trend in crude prices that is driven by a combination of robust demand and speculative activity.

The positive aspect of the crude prices story is the likely boom in construction activity in the Gulf countries. This could be an opportunity for companies such as Larsen & Toubro and Voltas, which have executed several projects in the region that could serve as a reference point for bagging more orders, and Gujarat Ambuja Cements, which appears well set to capitalise on the sharp spurt in cement prices in export markets.

The latter's earnings numbers for the July-September quarter have been buoyant with a fillip from exports as well as higher domestic prices, and there could be a further scaling up over the next few quarters. There are others that could benefit from the anticipated construction boom.
For now, we prefer the stocks of these companies, which have an established presence, higher efficiency levels that could compensate partially for rise in input costs and limited downside risks as large-cap stocks. Stock-specific recommendations of Business Line, however, will take precedence over this broad-investment strategy.
- Hindu Business line