DEFLATING INDIA


Wholesale Price levels have hit an all time low and rate cuts are coming, will it accomplish anything?

Wholesale Inflation levels reached the lowest recoded level in data released today. For the week of March 6th, the Ministry of Commerce and Industry estimates that factory gate prices rose by 0.44% year over year. The expectation is now that the Reserve bank will cut the repurchase rate lower despite the fact that, at 5% after being reduced by 400 basis points since October, rate cuts have thus far failed to spark any signs of recovery in the system.

Consumer prices have shown no reflection of wholesale declines yet. Prices paid by industrial workers (India’s measure of urban CPI) rose 10.45% in January, the highest since December 1998, with rural consumer prices even higher at 11.62%. With elections coming up this spring and job losses becoming an increasing worry the consumer data for February will need to begin reflecting declining wholesale levels if Prime Minister Singh is to get any political breathing room.

Agriculture:

One important positive call out in today’s data is the rapid decline in fertilizer prices. The price inflation of this critical component declined to 5.24% Y/Y versus 8.38% Y/Y the week prior. Declining fertilizer costs would come as a welcome relief for farmers to be sure despite subsidies but, at over 5%, the issues we outlined in our note on March 5th (interpreting inflation) continue to fester, and we are not alone in our thinking.

In an interview on Tuesday Arvind Virmani, Chief Economic Advisor to the Ministry of Finance, expressed concerns that lower growth in the agricultural sectors would likely make the government’s 7.1% growth forecast for 2009 unattainable. With the critical Punjab wheat crop already impacted by unseasonably warm weather combined with yellow rust outbreaks, underuse of fertilizers and pesticides could have a serious negative impact on crop yields.

Why do we write so much about the price of fertilizer? More than half of the Indian population is dependent on small farm operations for livelihood, and antiquated practices and bad government policies have not been addressed during the past 10 years while the “economic miracle” occurred in the IT outsourcing centers in Calcutta and other urban areas.

Now that external demand for high tech services has receded, the fate of farmers is crucial in our analysis for two reasons:

1) This is an election year and the unhappy rural population will be a critical factor in the coming reshuffling of power and, by extension, policy.
2) The India bull thesis which is so regularly flogged in the press is based on the assumption that the subcontinent will be resilient in the face of the global meltdown since “it is less dependent on exports than other major Asian Economies”. Far be it from us to question this logic of finding virtue in the fact that a major segment of the population is comprised of illiterate subsistence farmers living in abject misery -but clearly the thesis will be undermined if growth in the neglected agricultural sector slows or disappears.

We are short the Indian equity market via IFN, and continue to see the economy there as the most structurally flawed of the major Asian nations.

Andrew Barber
Director

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