Professional Documents
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Economics Group
Special Commentary
14% 14%
10% 10%
12% 12%
9% 9%
10% 10%
8% 8% 8% 8%
6% 6%
7% 7%
4% 4%
6% 6%
2% 2%
5% 5% 0% 0%
2004 2005 2006 2007 2008 2009 2010 Total Ag. Mining Manu. Energy Const. Trade Finance Other
Services
quarter from 1.6 percent in the first quarter. The agricultural sector, which represents about
15 percent of the economy, also accelerated. 1 Agricultural output was depressed last year by the
drier-than-normal monsoon season, and the bounce-back in output this year reflects a return to
more normal weather conditions.
The Indian Although economic growth in India is still short of the nine-percent-plus rates that were
economy has registered a few years ago, the 8.8 percent year-over-year growth rate that was achieved in the
bounced back from second quarter is the strongest year-over-year growth rate since the fourth quarter of 2007, just
its marked before the global economy hit the skids. The bottom line is that the Indian economy has bounced
slowdown in 2008- back from its marked slowdown in 2008-2009.
2009.
Looking forward, we expect that the overall rate of real GDP growth in India will moderate
somewhat. 2 Although exports are less important for India than for most other Asian economies,
slower growth in the rest of the world should have an adverse impact on Indian export growth in
the quarters ahead. 3 In addition, the modest tightening measures to date by the RBI, which are
discussed in more detail below, should also lead to slower growth. That said, the balance of risks
at present appear to be skewed toward unacceptably high inflation rather than insufficient
economic growth.
Strong Growth = Higher Inflation and Wider Trade Deficit
WPI inflation has Because the weights in the consumer price index have not been updated for years, the wholesale
shot up to double- price index (WPI) is considered to be the benchmark price index in India. As shown in Figure 3,
digit rates this WPI inflation has shot up to double-digit rates this year. Although some of the acceleration in the
year. WPI reflects sharp increases in food and energy prices earlier this year, prices of manufactured
products, which make up nearly two-thirds of the WPI index, have also increased markedly.
Figure 3 Figure 4
Indian Wholesale Prices Indian Merchandise Trade Balance
Year-over-Year Percent Change Billions of Rupees, Not Seasonally Adjusted
14% 14% 100 100
Total: Jul @ 9.9%
Manufactured: Jul @ 6.1%
12% 12% 0 0
8% 8% -200 -200
6% 6% -300 -300
4% 4% -400 -400
2% 2% -500 -500
0% 0%
-600 -600
Merchandise Trade Balance: Jun @ -491.5B Rupees
-2% -2%
-700 -700
2002 2004 2006 2008 2010
2002 2004 2006 2008 2010
1 The percent of value-added in the Indian economy that is accounted for by the agricultural sector has
declined to 15 percent today from 30 percent about 20 years ago. This decline in agriculture’s share of the
economy reflects, at least in part, the reforms of the early 1990s that helped to boost growth in other
sectors. As a point of reference, agriculture accounts for only 1 percent of value-added in the U.S.
economy.
2 As shown in our Monthly Economic Outlook, which is posted at www.wellsfargo.com/economics, we
project that real GDP growth in India will slow to 7.5 percent next year from 8.5 percent in 2010.
3 The export-to-GDP ratio in India is a bit north of 20 percent, whereas the comparable ratio in China is
about 40 percent. Hong Kong, Malaysia and Singapore, which are all small open economies, have
exports-to-GDP ratios that range from 100 percent to 300 percent.
2
Indian Economy Booming Again WELLS FARGO SECURITIES, LLC
September 01, 2010 ECONOMICS GROUP
rates is not readily available, data from the textile industry show that wages accelerated sharply
earlier this year in conjunction with the marked increase in WPI inflation. If employers pass on
recent wage increases, prices of goods and services could accelerate even further.
The widening in the trade deficit that has occurred over the past year or so is another indication
that the economy may be running a bit hot (Figure 4). The value of the country’s exports in the
first half of 2010 grew 24 percent relative to the same period in 2009. However, import growth
was even stronger—up 34 percent on a year-ago basis—and strength in imports is often a sign that
domestic demand is growing rapidly. Although reliable data on overall retail spending are not
readily available, the 30 percent increase in auto sales this year indicates that consumer spending
is alive and well, and some of this strength in consumer spending is undoubtedly helping to drive
robust import growth.
Thus, most signs suggest that growth in domestic demand is very strong at present and that If inflation remains
inflationary pressures may be building. Consequently, the RBI has raised its main policy rate by elevated, the RBI
100 bps since mid-March (Figure 5). Although most analysts look for another 50 bps or so of could hike more
tightening by early next year, the policy rate would remain well below rates that prevailed in than most investors
2008, at the height of the last inflation scare in India. If inflation remains elevated, the RBI could currently expect.
clearly hike more than most investors currently expect.
Figure 5 Figure 6
Reserve Bank of India Repo Rate National Savings and Investment in India
Percent As a Percentage of GDP
10.00 10.00 40% 40%
Gross Domestic Investment: 2009 @ 34.3%
Gross National Saving: 2009 @ 32.5%
20% 20%
2.00 2.00
Source: IHS Global Insight, Institute of International Finance, and Wells Fargo Securities, LLC
Despite some slowing next year, we generally remain upbeat on India’s growth prospects, at least We generally
over the next few years. Unlike China, where population growth has slowed to a trickle, India’s remain upbeat on
population is increasing more than 1.5 percent per annum at present, and demographers project India’s growth
continued solid growth for the foreseeable future. More people mean greater demand for goods prospects.
and services. In addition, the increase in the national savings rate that has occurred over the past
decade or so has helped to finance strong rates of investment (Figure 6). Increases in the labor
force, which are associated with strong population growth, and the capital stock, which reflect
robust growth in investment spending, are the wellsprings of long-term economic growth. These
determinants of long-run economic growth should remain favorable for the foreseeable future.
That said, there is no guarantee that India will fully realize its growth potential in the long run
due to some deep-seated problems. The government has been incurring large budget deficits for
years, the country’s infrastructure is notoriously poor, the labor market is inflexible, and
corruption is endemic. However, a more thorough discussion of India’s long-term potential
versus its deep-seated problems is beyond the scope of this current report. We will address long-
term considerations in a second report that we plan to release soon.
3
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