Rare spark of light in India's economy
By Robert M Cutler
MONTREAL - India's economy is providing some cheer to Asian investors after discouraging news last week from Singapore and South Korea, with manufacturing picking up and the stock market strengthening from 2011 lows. Even so, the good news may be insufficient to reverse recent negative trends.
Indian manufacturing has picked up thanks to new orders, as the Purchasing Managers Index (PMI) rose the most in six months in December to 54.2 from 51.0 in November, after falling from 52.0 in October. The PMI, published by HBSC/Markit, is constructed from a survey of purchasing managers at the largest companies. A value above 50 indicates economic expansion, below 50 contraction.
The PMI covering manufacturing and services together increased
from 52.3 in November to 54.7 in December, up from 52.3 in November, while employment also improved.
This is welcome news for investors in India, where the rupee was Asia's worst-performing currency for the year, plummeting almost 17% since the start of last year to 52.985 to the US dollar as of very early Friday morning, after breaking the 53 barrier Wednesday before recovering slightly. It had started 2011 at 45.339 rupees to the dollar.
Observers are consequently looking for the Reserve Bank of India (RBI) to continue to intervene to curb further speculation, as it began to do after the rupee depreciated below the psychologically important 50-to-1 level against the dollar.
The rupee's continuing fall, however, leads skeptics to question whether the RBI's actions will have any effect in the near term, as many institutions are continuing to short the currency. CNBC quoted the opinion of Morgan Stanley analysts that the rupee will stay under pressure so long as there is a threat of illiquidity on global financial markets, even if the RBI's moves decrease the currency's volatility.
The Indian stock exchanges did no better in 2011 than did the rupee, although the benchmark BSE Sensex 30 has recovered about 4.5% from its year low of 15,175 on December 20. The index closed on Thursday at 15,857, down from a 20,561 close on the first trading day of 2011, a decline of 22.8% in 12 months. If compounded by rupee depreciation, this represents a fall in value of fully one-third in dollar terms.
In mid-December, the index touched its lowest level since mid-August 2009 before recovering slightly. It now is just above an important technical support that forms the horizontal leg of a descending triangle that has been forming since early November 2010.
The fall in rupee's value has helped to stoke inflation, which remains stubbornly high at just above 9% for wholesale prices, although down from 9.73% in October. Eventual further action by the RBI will be facilitated by the anticipation of a reversal in price rises, but RBI deputy governor Subir Gokarn told a conference in Singapore on Thursday, as reported by Bloomberg News, that the high inflation and weak rupee together with high global energy prices may prevent a reversal of the RBI's recent record interest-rate increases.
Business expansion will be difficult because the cost of funds has risen so much. The ability of the country's top 500 companies (excluding banking and financial institutions and state-owned oil marketing companies) to service debt has declined to a five-year low not only due to high interest rates but also because of a fall in operating profits, according to a survey by Crisil Research reported in India's Economic Times.
Even though "the monetary cycle" that began in March 2010 "has peaked", Gokarn said, "that does not necessarily say that a quick reversal is in order because inflation risks are still visible, still high." This opinion came in spite of the headline food price inflation rate actually declining during the third week in December, reversing previous increases. That is because India's benchmark inflation index was still as high as 9.1% in November, a one-year low and down from 9.7% in October. Fuel prices in the same week increased at an annualized rate of 14.4%.
China's official PMI reported this week by the China Federation of Logistics and Planning (CFLP) rose in December to 50.3 from 49 in November, while the "other" PMI that China-watchers watch, compiled like India's by HSBC/Markit, also rose, to 48.7 from 47.7, but indicated contraction as it remained below the 50 level.
Skeptical estimates of China's economic growth for 2012, however, come in under the canonical 8% figure that has long been touted as necessary for sufficient job creation to absorb new domestic labor market entrants. The consensus remains slightly over 8%.
With weakness in the heavily export-led Singaporean and South Korean economies, China and India have an even more important role in Asian growth at least for the first half of 2012. However, China appears almost as much as India to be on a knife's edge.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the Massachusetts Institute of Technology and The University of Michigan, has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults
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