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Dear FM: at least do no harm

Dear FM: at least do no harm
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First Published: Mon, Feb 28 2011. 12 23 AM IST
Updated: Mon, Feb 28 2011. 12 23 AM IST
Despite two weighty government reports—one from the economic advisory council (EAC) to the Prime Minister and the other being the Economic Survey—putting out rosy forecasts of GDP (gross domestic product) growth being around 9% for 2011-12, the markets fell last week.
Investors don’t seem to be buying the 9% story. GDP growth forecasts by brokerages fall well short of that number and most say growth in the next fiscal will be lower than in the current year.
Also see | Low Expectations (PDF)
So how does the Economic Survey arrive at the 9% figure? It takes the investment rate of 36.5% for 2009-10, says that 4.1 units of additional capital produces one additional unit of output, and therefore, arrives at the output growth of 36.5/4.1, or around 9%.
But why take the 2009-10 figure for investment? Why not take the investment rate of 38.4% forecast for 2011-12 by EAC? That would give an even higher GDP growth rate of 9.4%.
Interestingly, EAC forecasts that total gross domestic capital formation in fixed capital will grow by 12.5% in 2010-11. The Central Statistical Organisation, though, in its advance estimates for 2010-11, estimated the rate of increase in gross fixed capital formation at 8.4%. That’s a big difference, considering that both the estimates were made recently.
For 2011-12, EAC keeps the rate of increase in gross fixed capital at 12.5%. Going by the December quarter results of capital goods firms, coupled with rising interest rates, the assumption of a high investment rate may be a leap of faith. The BSE Capital Goods index on the Bombay Stock Exchange is down around 10% this month against the benchmark Sensex’s 7% fall, not an indication of any great expectations from the budget.
There are other things on the market’s mind at the moment. Selling by foreign institutional investors continues. They’ve sold equities worth Rs 16,286 crore this month. The Sell Emerging Markets/Buy Developed Markets trade has recently been interrupted by a rush into energy funds, but outflows from Asia ex-Japan funds continue. High oil prices, if they persist, will hit energy-intensive emerging markets more, particularly India.
The latest inflation print shows that price rise in primary articles has moved higher. Banks’ liquidity position continues to be tight and short-term rates are above 10%. High networth investors are putting their money into fixed maturity plans rather than in equities. Corporate bond spreads have been rising.
The December quarter results show that corporate profits, too, are under strain. True, the growth in aggregate earnings of the Sensex companies has been decent. But a big reason for the good growth is the performance of two companies—Oil and Natural Gas Corp. Ltd (ONGC) and Tata Motors Ltd.
Morgan Stanley points out that excluding ONGC and Tata Motors, earnings of the Sensex companies are up just 10.5% year-on-year. Input and wage costs are rising. Earnings downgrades are in the pipeline.
There’s little the budget can do to soothe most of the worries in the markets. As a note from Nomura puts it, “An empirical examination of pre- and post-budget returns suggests that market reaction to the budget is not statistically significant.”
Two things could perhaps change that—some big-ticket announcements on reform that could excite investors, and higher taxes, which would be a dampener. Lowering the fiscal deficit is of course critical, but much will depend on how it’s done and its credibility.
As for expectations, this time we would like to see the finance minister quote Hippocrates: “Make a habit of two things: to help; or at least to do no harm.”
Graphics by Ahmed Raza Khan/Mint
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First Published: Mon, Feb 28 2011. 12 23 AM IST