Global Economics - India

JPMorgan Chase Bank, Singapore Rajeev Malik

Economic Research Global Data Watch November 9, 2007

JPMorgan Chase Bank, Mumbai Gunjan Gulati

India • Merchandise trade deficit narrowed in September owing to slower growth of imports • Fiscal and revenue deficits of the central government exceeded midyear target of 45% of the annual budget • Expect a marginal hike in retail prices of domestic fuels; oil companies to bear most of the burden

Indian crude oil basket price and WPI inflation %oya

US$ per barrel 80

WPI energy

70

10

60

5

50

Economic attention this week focused largely on the government’s reaction to rising global crude oil prices. Domestic retail prices of fuels are administered by the government, and changes in global oil prices are not automatically passed to the domestic market. Separately, the merchandise trade deficit unexpectedly narrowed in September owing to significantly slower growth of non-oil imports.

Merchandise trade deficit shrinks India’s merchandise trade deficit unexpectedly narrowed to US$4.4 billion in September 2007, much lower than the average of US$6.1 billion in the first five months of the current fiscal year (which began April 1). Significantly lower import growth relative to the previous few months slimmed the deficit for September. The trade deficit for the first half of the fiscal year thus stands at US$36.9 billion. Exports grew 19.3%oya in September, topping the 18.5% average of the previous five months. Export growth so far has been masking the underlying weakness likely to result from this year’s rupee appreciation. Import growth moderated to 2.3%oya, owing to a surprise deceleration in non-oil imports (-0.1%). Non-oil imports had grown at a buoyant 42.7%oya during April to August. The cause of September’s deceleration is unclear and there are no component details available. Also unclear is why, despite higher global oil prices, the oil import bill in September rose only 8%oya; less than the April-August figure of 9.3%. The rising crude oil import bill, strong non-oil imports, and slower export growth are likely to widen the trade deficit further in the rest of 2007-08. In our revised forecasts, we expect the trade deficit to deteriorate to US$102.2 billion this year from US$64.9bn in 2006-07. The wider trade gap is likely to more than offset the sizable surplus in invisible trade—which reflects strong remittances from Indians working abroad and software exports. The current account (CA) deficit is thus expected to worsen to US$22.2bn in 2007-08 (1.9% of GDP) from US$9.6bn (1.1% of GDP) last year. However, financing the wider CA deficit will not be a problem as capital inflows, especially foreign direct investment, will more than offset the CA shortfall.

15

Indian crude oil basket

0

Overall WPI

40

2005

2006

2007

-5

Merchandise trade balance US$ billion/month, 3mma 0 -1 -2 -3 -4 -5 -6 -7

2000

2001

2002

2003

2004

2005

2006

2007

Fiscal deficit exceeds midyear target The federal government’s fiscal deficit, during the first half of the fiscal year that started in April, stood at Rs812 billion, 53.8% of the budget estimate for the full year. The fiscal deficit in April-September fell 6.1% below the Rs865bn figure recorded during the same period of the previous fiscal year. The revenue (operating) deficit totaled Rs611bn in this fiscal year’s first half—85.5% of the budgeted target for the entire year. Note that the Fiscal Responsibility and Budget Management (FRBM) Act mandates the government to restrict midyear targets for the fiscal and revenue deficits to 45% of the full-year budget estimates. The latter were set at 3.3% of GDP for the fiscal deficit, and 1.5% of GDP fore the revenue deficit. Total receipts during the first six months grew 43%oya to Rs2367 billion. Net tax revenue remained buoyant, growing 23.5%oya, strengthened by strong collections of personal income tax (up 35.3%) and corporate tax (38.6%). Nontax revenue grew 19.2%oya. Total expenditure grew 26.2%oya to Rs3179 billion. Recent political uncertainty has increased the probability of a general election before the deadline of May 2009. The possibility of increased populist spending in the runup to an election is a key risk to achieving the fiscal and operating deficit targets. The India data watch is published biweekly, next on November 23. 73

JPMorgan Chase Bank, Singapore Rajeev Malik

Economic Research India November 9, 2007

JPMorgan Chase Bank, Mumbai Gunjan Gulati

Politics of oil With the international crude oil price hovering close to $100 per barrel, the government’s dilemma in deciding whether to raise domestic prices has intensified significantly. India imports more than 75% of its crude oil requirements. Further, state-run oil refineries control about 90% of the domestic fuel market. Any increase in international crude prices hurts these oil marketing companies (OMCs) significantly, since the domestic retail price of key fuels is administered by the government. The willingness of the government to announce a price hike is affected by the likely negative impact of such action on the ruling coalition’s political fortunes in a general election—increasingly likely to be held ahead of schedule—as well as elections in two states in the near future. The government may announce a small price hike next week, but the majority of the burden is likely to fall on the OMCs. Less than a month ago, the government agreed to issue bonds totaling US$5.8 billion whose proceeds would partially offset the revenue forgone from state-owned oil companies selling local fuels at subsidized prices. That revenue loss could amount to around 1.6% of GDP. The government could also opt to cut the excise duty (at point of production) on gasoline and diesel fuel, thereby reducing the difference between the selling price and the product price. Retail fuel prices were last changed in Feb 2007, when the prices of gasoline and diesel fuel were cut Rs2/liter and Rs1/liter, respectively, by way of a reduction in customs and excise duties. Currently, the rupee price of India’s import basket of crude oil has surged nearly 60% since the last revision in the local prices of gasoline and diesel fuel. However, political considerations continue to prolong the life of the oil subsidies, which are mainly off-budget.

Data releases and forecasts Weeks of November 12 - 23 During wk Core infrastructure index of Nov 12 %oya, nsa Overall %m/m, sa Electricity Coal Finished steel Crude petroleum Petroleum refining Cement 74

Jun

Jul

Aug

Sep

3.8 -0.8 6.8 1.3 -0.1 -1.8 9.9 5.6

6.8 2.1 7.5 1.1 9.6 0.9 4.7 9.0

9.0 0.7 8.7 8.7 8.5 6.4 8.2 16.2

__ __ __ __ __ __ __ __

Mon Nov 1 2

Foreign exchange reserves US$ billion Total foreign reserves Fx reserves ex gold

Mon Nov 12

Aug

Sep

229.3 221.5

247.8 240.4

262.5 255.1

___ ___

Jun

Jul

Aug

Sep

9.0 -0.3 1.5 9.9 6.8

7.5 -0.9 3.7 7.9 7.5

10.7 2.0 17.1 10.4 9.2

9.4 1.6 ___ ___ ___

Aug

Sep

Oct

Nov 3

4.0 9.2 -2.0 4.6

3.4 7.1 -2.5 4.3

3.0 5.4 -1.7 4.0

___ ___ ___ ___

Industrial production %oya, nsa Overall %m/m, sa Mining Manufacturing Electricity

Fri Nov 16

Oct Nov 19

Wholesale prices %oya Overall Primary Energy group Manufactured products

Review of past week’s data Merchandise trade (Nov 1) US$ billion, nsa Trade balance Exports %oya Imports %oya Oil Non-oil

Jul

Aug

Sep

-5.0 12.5 18.5 17.5 20.4 5.0 12.5

-6.9 12.7 18.9 19.6 32.6 6.0 13.5

-7.3 11.8 14.5 19.1 22.1 ___ ___

Jul

Aug

Sep

311.6 308.6 224.4 84.2 481.6 119.2 362.5 146.6 170.0 137.5 23.4

693.7 687.9 194.5 493.5 433.0 125.1 308.0 141.0 -260.7 -288.9 -401.7

-4.4 12.8 19.3 17.2 2.3 5.5 11.7

Federal government fiscal balance (Oct 31) INR billion Total receipts Revenue Tax (net) Nontax Total expenditure Plan Nonplan Interest payments Fiscal deficit Revenue deficit Primary deficit

__ 686.6 __ 338.7 __ 611.4 __ -272.7 __ 465.2 __ 144.3 __ 320.9 __ 97.8 __ -221.4 __ 76.1 __ -319.2