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Violent attacks in Mumbai overshadow key economic data points…

The terror in Mumbai appears to be finally abating. Indian Commandos freed a reported 200 hostages from the Oberoi-Trident Hotel today and only a handful of remaining terrorists are believed to be still holding out in the Taj Mahal and Tower hotels. The official death count now stands at 124, with over 350 wounded. During the crisis two key data points emerged which were overshadowed by the violence:

• Indian GDP data for Q3 released today arrived at 7.6%. That’s the slowest growth rate registered in 4 years. Finance Minister Chidambaram continues to stick to his guns that the global downturn will be offset in full by increased domestic demand bringing growth back to 9% next year.

• Weekly Indian wholesale Price levels released yesterday showed a slight decline to 8.84%, the fourth consecutive weekly decline (spurred by lower commodity prices). With WPI now having declined over 9 of the past 10 weeks, this data should clear the way for further rate loosening by the central bank.

Clearly Security threats are nothing new to India which has witnessed violent terrorism, both domestic and foreign, in every decade since independence. The nature of these attacks however, planned with military precision, suggests the work of a sophisticated terrorist organization. The fact that Pakistani based Lashkar-e-Toiba’s has denied involvement or endorsement combined with the choice of targets - aimed at hotels catering to foreigners and a Jewish center, raise the unwelcome possibility that is this is the work of a new element in India –possibly one allied with extremists from outside the subcontinent.

Regardless of security issues and the inflation reprieve provided by falling oil prices, we continue to view the Indian economy as structurally flawed and strongly question the rosy economic forecasts that Prime Minister Singh’s administration clings to with looming elections. In a nation heavily dependent on imports for many basic commodities where more than 25% of the population lives below the poverty line ($0.40 per day by Indian government metrics) we discount the ability of consumption to increase to government target levels.

We have been short India for the better balance of 2008. After covering our prior position profitably, we re-shorted India today (via IFN). We’re not sure what the world sees, but we are very sure as to what we see. This is a socialist bureaucracy that will be coming under increasing economic pressure.

Keith McCullough
CIO

Andrew Barber
Director